The Overnight Report: Don’t Fight The Fed

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This story features ZIP CO LIMITED, and other companies.
For more info SHARE ANALYSIS: ZIP
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Change in Tone?

The RBA was always going to raise its cash rate by 50 points yesterday following the 6.1% CPI print for the June quarter. There was nevertheless some concern it might go as far as 75. This may explain why the stock market response to the hike was positive, and why the Aussie plunged sharply.

Or it might be about a subtle change in language.

July’s 50 point hike was “a further step in the normalisation of extraordinary monetary support” due to the pandemic. Yesterday’s hike was “a further step in the normalisation of monetary conditions”, with no mention of the pandemic (although the statement does later reference the risk from China’s zero-covid policy).

It’s subtle, but could the disappearance of “extraordinary” imply the next rate hike might only be 25 points? The board is “not on a pre-set path”. But it’s still a long way to “neutral”.

Investors rushed into the consumer sectors yesterday, suggesting this might be the case. Discretionary rose 1.5% and staples 1.2%, while healthcare rose 0.5%.

The banks rose 0.8%, which we could put down to higher rates good for bank margins, or if the next hike is only 25 it eases the pressure on mortgages.

Real estate nevertheless bucked the trend in falling -1.6%, which is what you’d expect from a 50 point rate hike.

Holding the market back yesterday were the resource sectors, which are less connected to monetary policy. A fall of only -0.9% for energy was not too bad given the -5% plunge in oil prices overnight. But investors bailed out of the big iron ore miners, sending materials down -1.6%.

Among individual stocks, not too daunted by its -25% drop this week, Zip Co ((ZIP)) was back at it again (+15.1%). Rumour has it a2 Milk ((A2M)) is about to get approval to sell formula to the US, a la peer Bubs Australia ((BUB)). It rose 7.9%.

A couple of gold miners rounded out the top five along with Breville Group ((BRG)), which waved the flag for discretionary (+3.2%).

Appen ((APX)) posted a profit warning and fell -27.3%.

United Malt’s ((UMG)) profit warning continued to echo. It fell another -6.3%.

Credit Corp ((CCP)) reported earnings and fell -5.3%. Typically the knee-capper beats on its results.

Wall Street has followed up Monday night’s consolidation with a more extensive drop last night, as the market got tangled up in Fedspeak. But with the S&P500 down -0.8% last night, our futures are only down -11 points this morning.

Ahead of the Curve

The suggestion is Wall Street ran scared last night after Nancy Pelosi did indeed land in Taipei. It certainly heightens geopolitical nervousness but the real reason was chatter from a variety of Fed presidents.

They basically threw cold water on the assumption that the Fed has now passed “peak hiking”, and will ease off on the tightening from here. It was this assumption that drove Wall Street higher late last week to lock in the best month since the covid rebound of 2020.

San Francisco Fed President Mary Daly said the Fed is “nowhere near” finished with its fight against inflation, summing up the general response from Fedheads.

Early in the session, the US ten-year bond yield had traded as low as 2.50%, down -11 points, but by the close it was up 14 points at 2.74%. The two-year yield also jumped by a similar amount, maintaining the inversion gap.

The Fed is, of course, “data-dependent”. Data last night showed job openings fell to 10.7m in June from 11.3m a month earlier. Openings have dropped three months in a row after peaking at a record 11.9m.

Friday brings the July jobs report.

And, of course, there’s the matter of two consecutive months of negative GDP, which imply the Fed will have to ease up lest it sends the economy into a tail spin. But Wall Street has shrugged off the “technical definition”, and is waiting for the traditional caller of a recession – the National Bureau of Economic Research — to make the call.

The NBER is due to issue its assessment shortly.

The earnings season rolls on of course, and last night Caterpillar disappointed and fell -5.8%, bemoaning currency impact. This was the biggest hit on the Dow. Dow peer DuPont also railed against the strong dollar and fell -2.7%.

We recall Pinterest jumped 22% in Monday night’s aftermarket on its result, but last night closed up only 11%.

Uber nevertheless reported last night and jumped 19%.

PayPal has reported in last night’s aftermarket and is up 11%.

But, also in the aftermarket, Airbnb is down -8%, and Intel rival Advanced Micro Devices is down -6%.

This week is the second biggest week of earnings, with some 150 S&P500 companies reporting. Last week saw 170, and so far the tone has been positive on average. We’ll know more by the end of the week.

Commodities

Nickel’s pop was short-lived.

Otherwise, not a lot going on amid fear of some sort of Chinese retaliation, although for all the bluster, Beijing hasn’t done anything yet.

There was plenty going on in currency markets nonetheless.

The Aussie has copped it twice – once from the RBA response and again from a return to strength for the US dollar index (+0.9%) on the back of the Fedspeak. The Aussie is down -1.6% to US$0.6921.

Today

The SPI Overnight closed down -11 points.

The US will see private sector jobs numbers tonight.

BWP Trust ((BWP)) and Genworth Mortgage Insurance ((GMA)) report earnings today.

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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