The Monday Report (On Tuesday) – 14 June 2022

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This story features GOODMAN GROUP, and other companies.
For more info SHARE ANALYSIS: GMG
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Friday

On Monday last week the ASX200 was looking a little vulnerable, sitting just above support at 7200. When the RBA surprised with a 50 points hike, the index crashed through 7200, led by the banks. There was nevertheless some resistance offered by the resource sectors, as Shanghai’s reopening provided for commodity price strength.

That reopening has to an extent now been derailed, and the news on Friday was that authorities would lock down eight city districts over the weekend for testing. Commodity prices have thus given way, failing late last week to offset ongoing selling in the banks.

Market-wide selling was further driven by weakness on Wall Street, as fears started to creep in that Friday night’s CPI result may not confirm a peak in inflation after all. April’s US headline CPI came in at 8.3%, down from 8.5% in March, but economists were forecasting another 8.3% print for May. On Thursday the index crashed through 7100.

On Friday morning the banks started to find some buying on the ASX. But not for long. Not satisfied with resetting to a lower level on Wednesday night, Wall Street again tumbled on Thursday night. It was too much for our market on Friday.

The banks fell another -1.6%. Energy had been the only bright light on Thursday but on only a slight pullback in oil prices, dropped -1.6%.

The worst performing sector was real estate (-2.9%), which had already been hit hard on the RBA hike. Sector heavyweight Goodman Group ((GMG)) fell -2.8%. As a logistics REIT, Goodman had been a safe haven through the pandemic compared to office and retail REITs, but with consumer demand now threatened by surging inflation, online retail is also under pressure.

The Aussie ten-year bond yield rose another 5 points to 3.65%.

Consumer discretionary fell -1.7%, led by a -2.5% fall for Wesfarmers ((WES)). Not even Bunnings is being seen as defensive anymore.

Materials (-1.1%) is no longer a saviour, and a “mere” -1.1% fall for technology, which posted a similar move on Thursday, shows this recent market plunge has not been exacerbated by the Nasdaq.

The “outperformers” on the day were once again healthcare (-0.3%), industrials (-0.4%) and, to a lesser extent, staples (-0.7%), but lettuce not get carried away.

The index crashed through 7000 on Friday and on Friday night Wall Street crashed. Our futures were down -112 points or -1.6% on Saturday morning.

Friday Night

Had the US headline CPI printed 8.3% for May as forecast, Wall Street would likely have been steady-to-up on Friday night, given two prior sessions of solid de-rating ahead of the result. When it printed 8.6%, higher than March’s peak of 8.5%, any hope of peak inflation and a Fed “pause” in September were dashed.

The Dow fell -880 points or -2.7%, the S&P500 dropped -2.9% and the Nasdaq -3.5%.

That 8.3% annual rate forecast reflected a month-on-month increase forecast of 0.7%. Instead, the result was 1.0%, and 8.6% annual – the fastest pace of inflation since 1981.

I had flagged the issues in Friday morning’s Report. When Shanghai went into a month-long lockdown in April, oil prices pulled back to under US$100/bbl. When a reopening timeline was announced in May, oil prices bounced back again, and with the EU now moving to ban Russian energy exports, have since risen above US$120/bbl.

Energy prices rose 35% year on year in May — a big influence on the CPI result. The reopening of the US economy has sparked a huge surge in travel demand, prices be damned. Travel prices (flights, hotels) rose almost 40%. Not that surprising given the last two years’ lockdowns, just surprising that travellers are happy to pay up.

Food prices rose 12%, which shocked no one. As the war grinds on, there’s no end in sight.

Was there any good news?

Yes, the annual core CPI (ex food & energy) fell to 6.0% from 6.2% in April. It was also noted China’s May wholesale price index fell to 6.4% from 8.0% in April, as clearly Chinese supply is globally critical. But coming back to the US CPI, of great concern within the May result was a 5.5% increase in “shelter”, meaning rent for housing.

While 5.5% doesn’t seem like much compared to the other numbers, shelter is the biggest component by weight in the consumer price index. There is some relief expected ahead as US house prices – which have been on the same trajectory as Australian house prices over the prior two years of zero cash rates – should now start falling on rising rates, and that should lead to rent relief.

Except that rents are “sticky”. Landlords might be quick to put them up when demand is excessive, but slow to put them down again, given renters don’t just up sticks every time there’s a cheaper flat on offer. Everyone hates moving house.

The shock CPI result has brought the Fed swiftly back into the frame. The FOMC was expected to hike by 50 points this week, and again in July, but could it now go 75?

Jerome Powell had shot down talk of 75 points ahead of the May meeting, and he had basically locked in 50 pointers in June and July. Powell has long been determined not to surprise the market (unlike Philip Lowe), hence his candidness regarding forward guidance. For that reason consensus, at least on Friday night, had not shifted to 75 points this week, but there’s no reason why Powell can’t reset at this June meeting and suggest 75 might be on the table for July.

There’ll nevertheless be jitters before Wednesday night, although Wall Street was on Friday night back back to its prior 2022 low (3900 for the S&P500). And the Dow was down in ten of eleven weeks – the worst run since 1932.

That 3900 was a closing price low. The intraday low, prior to last night, was closer to 3800. Commentators agree that while the recent slump post the brief relief rally has been significant, it had also been orderly. There had been no true capitulation session. The VIX volatility index was at 28 on Friday night. Panic would have the VIX in the high 30s or low 40s. It seems everyone who wants downside protection (put options) mostly already has it.

But what about a recession? Surely those odds will increase on persistently high inflation?

Before Friday night consensus had little chance of a recession in 2022 and about even-money in 2023. Talk of “stagflation” has again brewed, along with oft-made comparisons to the 1970s.

The current inflation problem is predominantly supply-side driven, and is thus unusual (other than in prior wars). On that basis, historical recession signals do not necessarily apply. Note that there was a recession scare earlier this year when the US yield curve flattened and threatened to invert, given an inverted yield curve has often (but not always) signalled a recession ahead.

On Friday night’s CPI result, the US ten-year yield jumped 11 points to 3.16% and the two-year jumped 25 points to 3.07% — the latter implying the market sees a 3.0% Fed rate ahead. The two-ten gap is again closing, but hasn’t yet.

Commodities

The news from Shanghai had base metal prices falling once more, particularly aluminium (-3.6%) and nickel (-2.9%), while copper fell -0.8%.

There was not much impact on the oils, which fell slightly.

Gold had been under pressure all week from rising US bond yields, but on the biggest daily rise on Friday night, rose over twenty dollars to US$1872.20/oz, putting on its inflation hedge/safe haven hat.

The bond move had the US dollar index up 0.8%, and the Aussie down -0.6% to US$0.7055.

Monday Night

While it had all looked grim on Friday night, it only got worse last night. Note the table at the top reflects only last night’s moves, so add Friday night’s moves on top. On that basis, the Dow is down -1756 since the ASX was last open.

If there was any consolation, it was that the Dow was down -1000 with only minutes to close last night, before closing down -876. But the S&P500 broke through its prior intraday low to be down over -20% from its high, and the Nasdaq is down -34%.

If they weren’t talking a 75 points rate hike this week on Friday night, by Monday night they certainly were.

The US ten-year yield jumped another 21 points to 3.37%. The two-year jumped 29 points to 3.34%, closing the gap to only 3 points, and suggesting inversion is ahead. During the session there was, temporarily, a moment of inversion, but it didn't last.

While there remains disagreement about whether the US economy will or will not go into recession, the wider discussion now is whether the recession will be mild and short or deep and long. So far the latter scenario is considered likely.

The VIX volatility index jumped to 34.

Nothing was spared among the S&P500 sectors last night. The tech sectors took the biggest hits, as evidenced by the drop in the Nasdaq, other than energy, which fell over -5% despite oil prices closing slightly higher.

Energy has been the sector to hide in in 2022. But when investors have to sell everything to cover margin calls, they add their best performers to the list.

And that includes gold. Playing safe haven up to the close on Friday night, gold dropped over -US$50/oz last night night, no doubt under pressure as a source of margin call funds.

Another source, in 2022, is crypto. Last night a company called Celsius, which lends crypto currencies to prospective buyers in the same way gold can be lent, halted withdrawals. Celsius had been offering up to a 17% yield to holders of crypto to lend it out. Questions have now arisen as to the company’s solvency.

Bitcoin fell -15% to US$23,000, having peaked at US$69,000 in November.

Is this the capitulation session that hadn’t yet been seen? Well they don’t call it “Turnaround Tuesday” for nothing. Tonight will determine, in the short term, if there’s more to come. But on Wednesday night we get the Fed decision.

So anything is possible.

Note that last night our futures were down -183 points. Add that to Friday night, and they’re down -295 since the close on Friday.

Commodities

News over the weekend that a new cluster has been found in Beijing comes on top of lockdowns for testing that were planned in Shanghai.

But take your pick. Add in Chinese lockdowns to a possible US recession (and the two are closely related) and metals prices were down again (above table last night only).

Only the oils held on.

It also didn’t help that on yet another big leg up in US bond yields, the US dollar index jumped 1%.

The Aussie is down another -1.8% at US$0.6928.

The Week Ahead

The US May producer price index is due tonight.

The Fed decision is due on Wednesday night.

China will release May retail sales, industrial production and fixed asset investment numbers on Wednesday.

The Bank of England meets on Thursday.

New Zealand releases its March quarter GDP result on Thursday.

In Australia we’ll see the NAB business confidence survey today and Westpac consumer confidence survey tomorrow, followed by the May jobs numbers on Thursday.

Block ((SQ2)) holds its AGM on Wednesday.

The Australian share market over the past thirty days…

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