The Overnight Report: Over The Hump?

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

By Greg Peel

Downhill from here?

Australia’s headline CPI inflation rose by 1.8% in the June quarter when the market had forecast 1.9%, for an annual rate of 6.1% compared to 6.3% expectation. That’s up from 5.6% in the March quarter, but we recall that March was a shock to the upside, while yesterday’s number was an eyebrow-raiser to the downside.

Given we have to wait three months for the next reading, the indication now is that inflation may have peaked. The RBA is still well behind the curve nonetheless, so a 50 point rate hike is still expected next week and perhaps another in September before a “neutral” rate is achieved.

Economists do not believe labour market tightening is over.

Within the 6.1%, non-discretionary inflation rose to 7.6% annual, but the 1.8% quarter-on-quarter gain was well below March’s 3.0%, which was the shock at the time. Discretionary inflation rose by only 4.0% annual.

This shows that supermarkets and service stations, which operate on tight margins, have little choice but to pass price increases on to consumers and we have little choice but to pay up, even if we’re now eating more potatoes and less caviar, and riding a bike to the shops. Discretionary retailers enjoy wider margins, and are more limited in how much of a price increase they can pass on because we can otherwise live without their products.

Core inflation – ex food and energy – rose to 4.9% in the June quarter from 3.7% in March, which was actually higher than the market’s 4.7% forecast.

But having fallen -1.7% on Tuesday on the Walmart profit warning, our consumer discretionary sector bounced back 0.9% yesterday. If inflation is indeed peaking then the banks are in a sweet spot – more rate rises to come but less pressure ahead on household budgets and thus less mortgage stress. The banks rose 1.1%.

The Aussie ten-year yield fell -9 points to 3.24%, to now be -100 points down from the peak in mid-June.

Healthcare similarly bounced back, up 1.2% having fallen -0.7% on Tuesday.

In another reverse of Tuesday, materials fell back -1.2% and energy -0.3%. That’s your mining-bank switch right there.

Of course, the world remains beholden to Putin and Xi, so it would be brave to call inflation done and dusted. But rate hikes will eventually make their mark, which is the intention.

Speaking of rate hikes…

The Joy of 75

Last night the Fed hiked its funds rate by 75 points. No one expected anything less, but there were lingering concerns the FOMC might go 100 points following the 9.1% June CPI print.

The announcement itself did not move Wall Street. What did move Wall Street was what Jerome Powell implied in the press conference.

Powell began by continuing to talk tough on inflation, and left the door open for another “unusually large increase” at its next meeting in September, but did say the pace of increases would need to slow at some point. Last night’s hike takes the funds rate to 2.25-2.50%, and 2.5% was once considered “neutral”, but Powell has suggested 3.5% is necessary to stymie demand and bring inflation down.

That’s only another 100 points from here. Economists are now thinking 50-25-25.

Powell also declared the FOMC would be data-dependent, assessing the situation month on month. In other words, the Fed will no longer imply it knows what will happen tomorrow better than anyone else, abandoning the so-called “forward guidance” that brought the Fed unstuck from late last year (see: “transitory”).

The fact that there is a full eight weeks before the next meeting is also a relief for the market, as there will be two months of data sets (CPI, jobs etc) before the next decision, thus time for inflation to ease.

But a recession? Powell makes no bones about the fact the Fed is trying to slow the economy down. But he doesn’t see a recession because recessions and historically low unemployment just do not match. The market still believes a recession may be likely, but only a short and shallow one.

Indeed, the market seems fairly circumspect about the possibility of tonight’s first estimate of June quarter GDP being negative. That would mean two consecutive negative quarters and thus, “technically”, a recession. But no one pays too much heed to “technically”.

The good news is the earnings season, now around a third of the way through by number of S&P500 stocks, is proving to be not as bad as feared.

Having reported after the bell on Tuesday night, last night Microsoft (Dow) rose 6.7% and Google 7.7%, after both missed on earnings. The market had already priced the stocks down.

In this morning’s aftermarket, Facebook (Meta) posted an earnings miss, and the first quarter on quarter decline in revenue growth in its history, and is down -4.4% at present. But it’s a far cry from the March quarter, when Facebook lost about -25% on its report.

Ford also reported this morning, and is up 6.6% on a beat.

Just harking back to the things we have to buy and the things we don’t have to buy, well clearly, in America, Mexican food falls into the former category. Last night fast food chain Chipotle jumped 14% on an earnings beat driven by raising its prices.

Commodities

Note that the LME is closing just as the Fed statement is released, so no response yet for base metals. We do note however that the US dollar index fell -0.7% in response, which is positive for commodities.

Oil price rises have been attributed to lower than expected weekly US inventories, along with Putin halving the gas flow to Europe.

The lower dollar, and another -5 point drop in the US ten-year yield to 2.73%, helped gold.

The Aussie is up 0.8% at US$0.6995.

Today

The SPI Overnight closed up 56 points or 0.8%. Not quite as exciting as the S&P500’s 2.6% (or 4% for the Nasdaq) but then we didn’t fall with Wall Street on Walmart day.

We’ll see June retail sales numbers today.

The US GDP estimate will be released.

The quarterly production reports season winds up this week for the miners, and today we’ll see numbers from Fortescue Metals ((FMG)), Mineral Resources ((MIN)), Pilbara Minerals ((PLS)) and Sandfire Resources ((SFR)).

Aurelia Metals ((AIM)) and Champion Iron ((CIA)) will post earnings results, as will UR Westfield ((URW)) tonight.

Note that Rio Tinto ((RIO)) reported earnings after the bell yesterday. Early assessments are the financials disappointed with a much lower than estimated dividend too.

Macquarie Group ((MQG)) holds its AGM.

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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