The Overnight Report: BoE Gets Tough

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            [3] => ((CBA))
            [4] => ((CSL))
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This story features BABY BUNTING GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BBN
The company is included in ALL-ORDS

By Greg Peel

No Conviction

After a vague hint from the Fed vice chair on Monday night the FOMC may be willing to slow down, and a subsequent comeback on Wall Street, our futures showed up 12 yesterday morning. Excitable buyers, likely of the digital variety, nevertheless took the ASX200 up 45 points in the first twenty minutes.

But no one else wanted to play. The humans eyed off tomorrow night’s make-or-break US September CPI, and stayed right out of it. The index chopped its way lower all session to a weak close.

It was a different story in the bond market however, where conviction to sell was solid. Noting the US bond market was closed on Monday night, the Aussie ten-year yield leapt 17 points to 4.03% and the two-year 11 points to 3.37% yesterday.

Perhaps yesterday’s NAB survey had something to with it. The NAB business conditions index for September rose by 3 points to +25, following similar strength in August, suggesting rate hikes have had little impact on the business sector so far. Business confidence nevertheless slipped -5 points to +5, below its long run average.

This apprehension is not yet reflected in the hard data, ANZ Bank’s economists noted, with the survey’s forward indicators remaining strong. Capex and forward orders both improved, and capacity utilisation remains at historically elevated levels at 85.8%. This points to a strong outlook for business in the near term, ANZ suggests.

Food for thought for the RBA. But the RBA eased off the pedal at the last meeting, and Westpac suggests yesterday's consumer confidence index result, which showed a fall of -0.9% deep into pessimistic territory at 83.7, would have been even worse if it hadn’t.

Oil prices have retreated since their earlier surge post the OPEC production cut announcement, so energy fell back -1.6% yesterday. Technology was the next worst performer on -1.0%, clearly running from bond yields.

It might have been worse for the other interest rate sensitive sectors, but the banks only fell -0.3%, discretionary -0.2% and real estate -0.9%, suggesting maybe there’s not much lower to go, or maybe just that as I said, no one wanted to play yesterday.

Utilities (+0.1%) and industrials (+0.4%) actually made gains.

Train wreck of the day was the seemingly can-do-no-wrong Baby Bunting ((BBN)), which issued an inflation-related profit warning and fell -20.5%. Prior to the announcement, all of the five FNArena database brokers covering the stock had Buy or equivalent ratings.

Canary in the coal mine? Second worst performer in the ASX300 was discretionary peer City Chic Collective ((CCX)), which fell -7.9%.

Wall Street attempted to kick on into the positive last night following Monday night’s turnaround, but that was to be scuppered.

Our futures are down -22 points this morning.

Blimey

Vice chair Leal Brainard gave a nod to tighter liquidity conditions in her speech on Monday night, revealing “we are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks”. Noting the Fed is withdrawing liquidity from the market at a rapid pace (QT), Wall Street turned around from the depths on Monday night, and kicked on with it last night.

The Dow was up 400 points as the last hour approached, but then the Bank of England dropped a bombshell.

To recap, the new UK government’s announced policy of extra spending and tax cuts on top of an already overblown budget deficit sent the UK bond market into a tailspin. In order to prevent the collapse of UK pension funds, the Bank of England stepped in to buy long-dated bonds, even as it tightens at the short end.

The move sent bond yields plunging and stock markets soaring around the globe.

Truss has since dropped her tax cuts for the rich, but there was still surprise last night when the BoE told UK pension funds they had until Friday to get their books in order, as it will withdraw from the market thereafter.

Within minutes the Dow was back to square. While it managed to close slightly in the green, the Nasdaq still fell -1.1% and the S&P500 is back testing its September low.

The US ten-year yield rose 5 points to 3.94%.

Adding salt to the wound, the IMF last night cut its outlook for economic growth in the US to 1.6% this year, down from a July forecast of 2.3%. It expects only 1% growth in 2023. Disturbing, but then the IMF typically runs well behind the market with its forecasts.

Much now hangs on tomorrow night’s CPI result, even if the Fed appears set on its path. Beforehand we’ll get a curtain-raiser tonight in the form of the PPI.

We’ll also see the minutes of the September Fed meeting, although the PPI and CPI numbers will likely render those redundant.

Commodities

When China’s independent Caixin services PMI showed a drop into contraction on Monday, oil prices began to take back the gains from the OPEC production cuts. News last night is that China is again stepping up covid testing in Shanghai and other cities, sending oil prices lower once more.

Despite the US dollar index dropping back -0.2% last night, the Aussie is down -0.3% at US$0.6278.

Today

The SPI Overnight closed down -22 points or -0.3%.

US PPI and Fed minutes tonight.

Bank of Queensland ((BOQ)) reports earnings today.

Commonwealth Bank ((CBA)) and CSL ((CSL)) hold their AGMs.

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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