The Overnight Report: Hitting A Ton?

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

By Greg Peel

Waiting Mode

With the US CPI data due last night, yesterday our futures suggested no change and were not far off the money. The ASX200 bungled along all day slightly lower, before a late afternoon kick saw it close slightly higher.

The main theme of the day was oil, after the WTI price fell -8% on Tuesday night.

The energy sector was unsurprisingly the worst performer, but a -1.8% does not much correlate with the -8% price drop and with the extent of reactions to oil price moves in recent times. Wall Street had a similar reaction on Tuesday night, perhaps suggesting oil prices are now more reflective of the actual supply/demand balance.

Utilities jumped on board, falling -1.5%. Among the top five index losers on the day were Woodside Energy ((WDS)), worst performer with -2.9%, Viva Energy ((VEA)), down -2.2% and Origin Energy ((ORG)), down -2.0%.

Going the other way were stocks benefitting from lower oil prices, namely Qantas Airways ((QAN)), up 4.2% and Transurban ((TCL)), up 1.0%, to help the industrials sector up 1.1%.

Consumer discretionary, closely linked to consumers’ fuel cost burden, rose 1.2%.

Materials was down, again, by -0.6%, with the copper price a main culprit this time. Sandfire Resources ((SFR)) fell -1.8%.

The banks appear to have been at least one destination for money flowing out of the resource sectors lately, despite talk of global recession. The two big sectors have tended to swap inflows throughout history. Financials rose 0.7%.

I say global recession, but few economists fear Australia will itself fall into recession – we have a good track record of not doing so – but a slowdown is a given. We tend not to fall into recession because of support from commodity prices, yet they have been falling hard for a couple of months now (albeit from very lofty heights).

There is certainly no sign of recession being priced in the Aussie yield curve. Last night the US curve moved meaningfully into inversion on the two-ten year basis, but our two-year yield is way below the ten – 2.44% to 3.37%.

It may have been a hot US CPI print, but Wall Street was to an extent ready for it. And after waiting all day yesterday to see what might happen overnight, our futures are down a mere -4 points this morning.

Note that the RBNZ made yet another 50 point rate hike yesterday to 2.5%, above the bank’s own declared “neutral” rate of 2.0%. The South Korean central bank also raised by 50 points. On the other side of the globe, the Bank of Canada hiked by a full 1% (100bp).

Is this the peak?

When the US June headline CPI printed 9.1% last night – up from 8.6% in May and ahead of 8.8% consensus – the Dow opened down -470 points. By lunchtime it was back to square.

Late selling ensured a weak close, but not a shocker. There had been plenty of talk leading into last night of the June CPI possibly starting with a 9.

But surely, this has to be the peak?

When the CPI hit a surprise 8.5% in March, prompting the Fed into a 50 points rate hike, talk then was of it possibly signalling a peak. It duly fell to 8.3% in April, but oil prices had pulled back somewhat that month and had risen again in May.

When the CPI went back up to 8.6% in May, prompting the Fed into a 75 point rate hike, talk then was it likely represents a peak. But then China came out of lockdown in June and oil prices shot up again, and the whole time rents – which make up a third of the CPI – had been steadily rising.

Hence 9.1% in June.

So as of last night, futures markets are pricing in a better than 50% chance of the Fed being forced to go a full 100 basis points this month. But not everyone believes so.

Yes, there’s been talk all year on inflation having peaked, but July has brought serious concerns over global recession, and commodity prices – oil included – have been crunched. Rents are still rising, but must soon feel the impact of falling house prices as mortgage rates rise (how would you feel about another 100 points on your mortgage right now?)

So now the calls are much louder, and more emphatic, that this time inflation has peaked. To back that up, the June core CPI – ex food & energy costs – fell to 5.9% from 6.0% and had hit 6.5% in March.

Then there’s the matter of the Fed preferring the core PCE measure of inflation to the CPI as its guide. The PCE is less weighted to rents, although the June data come out after this month’s Fed meeting.

Last night the Atlanta Fed president, when asked if 100bp was possible, suggested “everything is in play”.

He’s not a voting member. And Fed-watchers suggest another 75 points this month is more likely than 100 as signs are the economy is slowing, and may already be in recession. The Fed had itself admitted it got inflation very wrong up until the March meeting, and Wall Street is largely convinced the Fed may well get it wrong again the other way around and have to wind back its rate hikes next year.

Evidence of that is in the US yield curve. Last night the two-year yield jumped 9 points to 3.13%, and the ten-year fell -5 points to 2.92%, for -21 points of inversion.

When all said and done, Wall Street did not react with any sort of panic last night. Tonight brings earnings results from JPMorgan and Morgan Stanley, and by early next week all the big banks will have reported. Next week then brings a raft of Dow stock reports, and the following week the big tech names.

The truth will come out.

Commodities

A bit of a refreshing change to see green on screen.

The fact the CPI did not much surprise is evident in the US being down slightly, and the Aussie is also little changed on US$0.6760.

Today

The SPI Overnight closed down -4 points.

The US June PPI is out tonight.

We’ll see June jobs numbers.

Auckland International Airport ((AIA)) and Netwealth ((NWL)) provide quarterly updates.

The Australian share market over the past thirty days…

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

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