The Overnight Report: Happy New Year

Array
(
    [0] => Array
        (
            [0] => ((CBA))
            [1] => ((JHG))
            [2] => ((PBH))
            [3] => ((DMP))
        )

    [1] => Array
        (
            [0] => CBA
            [1] => JHG
            [2] => PBH
            [3] => DMP
        )

)

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Empty Windows

Well, so much for end-of-year window dressing from fund managers after a weak second half. Clearly the sellers had been lined up ready to pounce all along. When no buyers stepped up in the first half hour, the sellers moved in.

It all became too much in the last hour of trade, at which stage the ASX200 was down -50 points. Not only did the selling accelerate, market-on-close orders removed another -40-plus points after the bell.

Just get me out.

The recession bells are ringing louder than ever. The ASX200 closed FY22 down -3.6%, but lost -13% from the early January peak. No sector was spared yesterday. Healthcare managed to hang on with only a -0.2% loss, but all of energy, materials, financials, real estate and utilities fell between -2-3%.

Discretionary, staples, industrials and technology all fell over -1%.

There was no joy provided by data from China. The Chinese manufacturing PMI for June bounced back into expansion (just) at 50.2 from 49.6 in May, and services to 54.7 from 47.8, reflecting Shanghai's reopening.

Last night all commodity prices were trashed. So much for Shanghai.

Local data showed private sector credit rose 0.8% in May, to be up 9.0% year on year the fastest pace of growth since October 2008 (when everyone was borrowing to stay afloat). It seems incongruous that households and business should increase their borrowing in the face of economic slowdown, but then it makes sense to get in ahead of RBA rate hikes.

We'll see how those numbers pan out in ensuing months.

Commonwealth Bank ((CBA)) increased its savings account deposit rates by 25 basis points yesterday. What a great bunch of guys (the RBA went 50). Then it increased its fixed mortgage rates by 140 points.

Didn't help CBA any yesterday nonetheless. It fell -2.8% but then the financials sector lost a net -2.3%. A startling jump in bank net interest margins only works if people borrow as well as lend (deposit). Noting the May credit increase, maybe CBA has missed the boat.

Fund managers were also under fire yesterday. No performance fees for you. Janus Henderson ((JHG)) fell -5.7%.

Looks like investors feel the stock market will be abandoned in the second half and we'll all just back the gee-gees instead. PointsBet Holdings ((PBH)) jumped 10.7% yesterday, with next best index performer Domino's Pizza ((DMP)) not even managing 1%. But PointsBet makes those sorts of moves, up and down, most days.

So, did yesterday's action suggest the selling will just continue into the new year? Well, perhaps we can take some slight comfort from the fact Wall Street also ended June on a weak note, but our futures are up 12 points this morning.

Not with a Bang

The US personal consumption & expenditure (PCE) measure of inflation for May came in at 6.3% — unchanged from April.

The Dow fell -600 points.

It didn't seem to matter that the core PCE, ex food & energy, fell to 4.7% from 4.9% (peak of 5.2% in March) and this is the measure the Fed focuses on. There is no change from the expectation the Fed will go another 75 points this month.

The US ten-year yield fell -12 points to 2.97% and the two year also fell under 3% (the spread is +5 points), having hit 3.5% at the peak. Yields are not falling because the market now expects the Fed to be less aggressive, but because it thinks the Fed is going to be too aggressive and force a recession. By next year, it will be cutting rates again, many believe.

Investors buy bonds as a safe haven in times of recession, as equity returns fall. And anything over 3% looks a lot better than the sub-1% yields on offer only months ago, even if that represents a negative return on current inflation levels.

But, from the weak start Wall Street did see the sort of end-of-year buying that the ASX did not. By early afternoon the Dow was down only -50 points. In the last hour it fell again to be down -400, before closing down -250.

Of course, Wall Street has fallen a lot further this year than the ASX, because of its weighting to "growth tech". The June half ended with the Dow down -15%, the S&P500 down -21% and the Nasdaq down -30%. It was Wall Street's worst first half since 1970.

Don't mention the seventies.

Wall Street also focussed on a consumer spending growth number in the June PCE data of only 0.2%, or -0.4% in real terms.

The thing about recessions is that they are self-fulfilling. If everyone starts talking about a recession, and households and businesses decide to act accordingly before they get backward-looking data that confirm a recession, then the economy will be in recession.

US consumer confidence at historical lows, spending growth is easing, house prices are coming down to make owners feel less wealthy, and the whole thing feeds on itself.

The good news (and this is also true in Australia), is that with unemployment also historically low, and there being more job vacancies than there are available workers, any recession should not be too deep. But already there are signs of lay-offs, from the likes of Amazon, for example.

The other good news is the pace of commodity price pullbacks is accelerating, which will lower inflation readings ahead. But inflation will not be easing because the supply shocks that sent it soaring will be receding, but because demand will be drying up.

Should be a fun second half.

Commodities

Yeah, well

OPEC-Plus decided last night not to alter its current production quotas.

The Aussie is up 0.4% at US$0.6907.

Today

The SPI Overnight closed up 12 points.

June manufacturing PMIs will be released across the globe today/night.

Locally we'll see June house prices.

The Australian share market over the past thirty days

For more detail go to FNArena's Australian Broker CallReport, which is updated each morning, Mon-Fri.

Allovernight and intraday prices, average prices,currency conversions and charts for stock indices,currencies, commodities, bonds, VIX and more available on the FNArena website. Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms