The Overnight Report: Policy Angst

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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

A Pause For Thought

"We are conscious that there are lags in the operation of monetary policy and that interest rates have increased very quickly.

"And we recognise that, all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.

"But how high interest rates need to go and how quickly we get there will be guided by the incoming data and the evolving outlook for inflation and the labour market."

And with that, the ASX200 rallied 1.8%, having fallen -1.4% the day before. On these comments yesterday from RBA governor Philip Lowe, investors decided we’ve seen the last of the 50 point rate hikes. Risk on.

The Aussie ten-year yield fell -14 points to 3.56% and the two-year also fell -14 points, to 2.87%, pulling away from the perceived “neutral” rate target over 3%.

But for one sector, it would have been a Buy Everything session.

That sector was energy, which not only had to cope with a -5% fall in oil prices overnight but also Woodside Energy ((WDS)) going ex its massive dividend.

Take out energy’s -2.8% fall (down over -4% early in the session), and we might note the direct comparison of staples rising only 0.6% when consumer discretionary jumped 2.6%. Staples has been the one sector to hold its ground as the pure defensive throughout recent market weakness, while discretionary has wallowed on the promise of high inflation, higher rates, higher energy prices and household stress.

The RBA is not about to pause its hikes, but Lowe has effectively acknowledged that the impact of tighter monetary policy follows on a lag, taking up to several months to really work through the system. Notwithstanding that banks don’t tend to muck around with mortgage rates. The risk therefore – and this is the big discussion point on Wall Street – is that the RBA goes too hard, too fast.

And takes the economy into recession.

It will still depend on the data. But the good news on that front is as of next month, the ABS will bring Australia into line with developed economies and publish monthly CPI numbers. While October brings the September quarter CPI result as usual, we won’t have to wait until January to see the next inflation reading.

Technology was the best performing sector yesterday (+3.2%), as one might expect. Tyro Payments ((TYR)) jumped 28% after rejecting a takeover offer, while Life360 ((360)) leapt 16.4%, Megaport ((MP1)) 12.6%, Novonix ((NVX)), which is in battery technology, 11.2% and Zip Co ((Z1P)) 9.0%.

These aren’t all strictly tech sector names, but they are “tech”, and highly volatile. On the downside, if we take out Woodside’s -5.5% drop and Medibank Private’s ((MPL)) -1.7% fall (it also went ex), the next worst performance was -1.4%.

It was that sort of day.

To put it into perspective, the index is up about 20 points in two days.  So spun-out are the futures that they closed flat this morning.

No Pause

“History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”

Somewhat of a contrasting view from Fed chair Jerome Powell. While Wall Street chopped around last night before rallying into the close, it was agreed Powell was simply reiterating last night what he said at Jackson Hole last month.

Under more scrutiny was the 75 point rate hike implemented by the ECB. While this was as expected (and was not 100), it is still being criticised as achieving little more than to kick the European economy when it’s down. Runaway inflation in Europe and the UK is all about the energy crisis, and that is not a natural phenomenon.

It will be interesting to see what the Bank of England does next, given forecast of inflation in excess of 20%. It’s all also interesting that one day a former anti-monarchist is chosen as PM, and the next…

The best performing sector in the S&P500 last night were the banks, which reflects rising global rates.

Otherwise Wall Street is looking ahead to next week’s August CPI result.

The Fed has clearly indicated it needs to see a sustained fall in inflation before it reconsiders its stance. Powell specifically noted that while the drop to 8.5% in July from 9.1% in June was heartening, it’s just one month. Hence if August brings a lower number again, it won’t change near-tem policy.

But Wall Street is hanging on the result. Of particular note is the -30% fall in oil prices from the highs of US$120/bbl.

Notwithstanding any unforeseen shocks in the meantime, Wall Street is expected to remain poised until Tuesday night.

Commodities

News last night was that European metal smelters have begun cutting production due to too-high energy prices, noting smelting is a very energy-intensive operation. With the crisis far from over, further cuts are expected.

In other news, the Chinese city of Zhengzhou vowed yesterday to start building all stalled housing projects within 30 days, by making good use of special loans, asking developers to return misappropriated funds, and encouraging some real estate firms to file for bankruptcy.

Hence a pop in the iron ore price.

The oils saw some consolidation after two big falls.

The Aussie is down -0.3% at US$0.6754.

Today

The SPI Overnight closed unchanged.

China will see August inflation numbers today.

The changes to the S&P/ASX indices announced last week become effective after today’s close.

Nine Entertainment ((NEC)) and WiseTech Global ((WTC)) are on today’s much shorter list of stocks going ex.

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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