The Monday Report – 10 October 2022

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

By Greg Peel

Bond Creep

The ASX200 fell -50 points from the open on Friday and managed to only claw back to down -40 by the closing bell, before dropping again on market-on-close orders heading into the weekend, and the US jobs numbers overnight.

Following moves in the US on Thursday night, the Aussie ten-year bond yield rose 7 points to 3.84% on Friday and the two-year 6 points to 3.26%.

Yields have been creeping back up steadily since last week when the Bank of England intervened in the UK market and the RBA hiked by 25bp and not 50bp. We have ostensibly followed the US, where stubborn Fed rhetoric has led to the assumption of more aggressive rate hikes to come by year-end at least.

The result on Friday is the local real estate sector got creamed again, down -2.0% to be the worst sector performer. Financials fell -0.7% and technology -1.8%.

After some strength last week it was a weak day for materials, falling -1.2%, but it was a case of pick your mineral. Three of the top five ASX200 winners on the day were miners – of coal, lithium and gold – and three of five losers were miners – of mineral sands, iron ore and nickel.

Iron ore tends to dominate net moves.

On the flipside, energy was the only sector to close in the green, up 1.0%, as oil prices continue to rise in the wake of the OPEC production cut. It’s all well and good for oil & gas stocks, but not good for prices at the pump, and hence inflation, particularly now the excise holiday is over.

We can only be thankful the RBA appreciates the damage, but on higher rates and oil prices, consumer discretionary fell -0.8% on Friday and communication services -1.0%.

There were mixed moves in the utilities sector, which fell a net -0.2% after Origin Energy ((ORG)) rose 1.2% on higher oil (and thus gas) prices while AGL Energy fell -2.9% after the board recommended shareholders vote against three of the four directors nominated by Cannon-Brookes, suggesting they’d not be effective.

Cannon-Brookes owns 11.3% of AGL.

No joy to look forward to today with Wall Street plunging once more on Friday on strong jobs data.

Our futures were down -61 points on Saturday morning.

Not Good News

There was some good news (formerly known as bad news) for Wall Street in Friday night’s September jobs report. The US added 263,000 jobs – the lowest level since April 2021 – missing forecasts of 275,000. The participation rate fell and the pace of wage growth slowed.

But not nearly enough.

263,000 is still a strong number in isolation, the participation rate ticked down ever so slightly, and while wage growth fell to 5.0% year on year from 5.2% in August, that’s still one of the fastest growth rates since the 1980s. Plus the unemployment rate fell to 3.5% from 3.7%.

Nothing here to stem the Fed’s resolve.

The US ten-year yield rose 6 points to 3.89% and the two-year rose 6 points to 4.31%. The ten-year is homing in on its previous high of 4%, pre Bank of England intervention, while the two-year is now back at its high.

The Fed has forecast, via its dot plots, another 100-125 points of rate hikes in 2022, which implies a range of 4.00-4.50%. The two-year is now sitting in the middle, and the jobs number offered no relief.

Another 75 point hike is likely coming, even if this week’s CPI comes in lower. While the Fed in theory ignores oil prices (but in practice is well aware), the fact rising oil prices are again driving up prices at the pump is bad news for headline inflation and bad news for consumer inflation expectations.

Recent consumer confidence data have shown a rebound from the depths but largely due to lower gasoline prices. If consumers lose confidence, fearing a recession, they will themselves induce that recession.

In more bad news on Friday night, chip-maker Advanced Micro Devices issued a profit warning due to weakening PC sales and fell -13.9%, dragging down PC software giant Microsoft (-5.1%).

Samsung also issued a warning, suggesting its profit could be down -32% in the September quarter. Aside from TVs and smart phones, Samsung is big in memory chips. Samsung’s warning had Apple (Dow) down -3.7%. All tech stocks were hit hard.

Despite Friday night’s plunge, Wall Street still managed to book its first up-week in four, albeit trimmed back to around 1%.

The S&P500 closed at 3640, above the June intraday low of 3636, if that’s any comfort. It was already breached the week before.

On to the CPI, and then earnings reports begin to roll in.

Commodities

As noted, metal and mineral prices have become quite mixed. Aluminium gave back some of its week-long gains, with still no news on an LME ban on Russia.

China is back today.

Brent crude is in danger of re-taking US$100/bbl.

The US dollar is up another 0.5%, weighing on gold, and the Aussie is down -0.5% at US$0.6374.

The Week Ahead

The US September PPI actually comes in ahead of the CPI this month, on the Tuesday. CPI on the Wednesday.

The US will also see retail sales and consumer sentiment on Friday.

The US bond market is closed tonight for a bank holiday, which for stock markets is almost a relief in itself.

China will report inflation and trade data on Friday.

Locally we’ll see the NAB business and Westpac consumer confidence surveys tomorrow.

Bank of Queensland ((BOQ)) reports earnings on Wednesday.

Telstra ((TLS)) holds its AGM tomorrow, followed by Commonwealth Bank ((CBA)) and CSL ((CSL)) on Wednesday.

The Australian share market over the past thirty days…

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