The Overnight Report: On Your Marks

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            [3] => ((CRN))
            [4] => ((WHC))
            [5] => ((AZJ))
            [6] => ((PRN))
            [7] => ((WDS))
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This story features BANK OF QUEENSLAND LIMITED, and other companies.
For more info SHARE ANALYSIS: BOQ
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Beautiful One Day

Action on the ASX yesterday was misleading on two counts. Firstly, the ASX200 struggled its way unconvincingly to a gain of over 20 points by the closing bell, only to give that all back on market on close orders. Secondly, the flat close belied weakness in almost all but one sector.

The banks rose 1.9%, and real estate chipped in with 0.9% gain. While the Aussie ten-year yield fell -9 points to 3.94%, the surge in the banks was all about the earnings result from Bank of Queensland ((BOQ)).

The bank reported an increased profit and increased dividend, but more importantly: indicated that margins will benefit from higher interest rates in the year ahead, despite pressure from costs. Bank of Queensland shares jumped 11.1% to top the index.

The result lit a fire under the sector, which had been struggling as bond yields rose, and Westpac’s ((WBC)) sympathetic 3.8% gain put it fourth on the top five table. ANZ Bank ((ANZ)) just missed out with a 3.3% rise.

Resources provided the main counter, with energy falling again (-1.5%) on lower oil prices and utilities joining in (-2.2%), still assessing the spectre of a 35% increase in electricity prices ahead. Materials fell -0.9%, thanks to lower iron ore, base metal and gold prices.

The fall in bond yields provided no reprieve elsewhere. Technology fell another -0.9% as it followed the Nasdaq, while healthcare dropped -1.1%.

Even staples fell -0.6%.

Energy sector weakness overcame news in the coal market. Coronado Resources ((CRN)), not in the index, jumped 7.7% after confirming it was in talks with Peabody Energy Corp for a potential merger. Whitehaven Coal ((WHC)) rose 3.0%.

The -20 point drop after the bell no doubt reflects a removal of risk ahead of tonight’s US CPI report. Weakness across the bulk of the market suggests investors are nervous. Best to miss the beginning of any rally on a good result than to be caught in another big downdraught.

No one is predicting a particularly good result.

Weighing the Cost

Last night’s Fed minutes suggested the FOMC sees the cost of not taking enough action to curb inflation as greater than the cost of taking too much. In other words the Fed is prepared for the US economy to contract but not for inflation to run out of control – known as inflation expectations becoming “unanchored”.

At present expectations are for inflation to come down, but maybe slowly. The US producer price index for September rose 0.4% month on month when forecasts were for 0.2%. The annual increase dipped to 8.5% from 8.7%.

The core rate also rose 0.4%, but the annual pace remained unchanged at 5.6%.

Taking the Fed’s weighing up of the costs and the steady core PPI, and Wall Street might have in isolation seen another leg down last night, and bond yields jump. But aside from tonight’s CPI being the more critical number, a choppy session and a mildly lower close for the stock market, and a -4 point drop in the ten-year yield, suggest Wall Street has now heard it all from the Fed, and has already reacted accordingly.

There was some light at the end of the tunnel in the minutes nonetheless. The Fed intends to take rates into restrictive territory and then stop. While the FOMC decided it would be important to calibrate the pace of further policy tightening with the aim of mitigating the risk of significant adverse effects on the economic outlook, it intends only to pause for a period of time, not “pivot”.

Many in the market still believe the Fed will indeed go too far and be forced to pivot, ie cut rates, when the US economy falls into a hole. But that’s not the way the FOMC sees it at present.

Tonight’s CPI remains critical. Wall Street is not expecting any major decrease – not one economist surveyed by CNBC is forecasting a number below 8% (last 8.3%) – so anything in the sevens will likely be fuel for a snap-back rally.

Between 8.0-8.3%, Wall Street will likely be little moved. Above 8.3% would not be a complete shock, unless it’s meaningfully above, and considering the damage done to date, may not prompt another big sell-off.

From the headline perspective, food prices are refusing to retreat, and oil prices have risen since August.

Last night Pepsico bemoaned stubbornly high input costs (noting it sells not just cola but also other beverages and a range of snacks). At the same time management was surprised at just how willing consumers were to pay higher prices. The company’s earnings result was worth a 4.2% jump.

Never stand between an American and sugary/fatty food and drink.

While this observation might be positive for at least one part of the economy, it’s not good news on the inflation front if higher prices are not leading to demand destruction. That’s what is needed to bring inflation down.

It may prove to be the case with regard apparel and other general goods, noting the likes of Target, Walmart and Nike have all been stuck with too much inventory and will need to discount.

There’s still oil prices, and they could go anywhere. Right now ongoing lockdown potential in China is countering the OPEC production cut, but were China to fully reopen, and stay open, oil prices could quickly be back in triple digits.

Rents have begun to fall back, but only marginally, and will certainly not plunge.

We could speculate for hours, but tonight we’ll know.

Commodities

Neither China nor the US dollar are helping metals and minerals at present, or oil.

Gold enjoyed some reprieve on lower bond yields.

The Aussie is down -0.1% at US$0.6272.

Today

The SPI Overnight closed down -18 points or -0.3%.

The US CPI is out before the Wall Street open.

Aurizon Holdings ((AZJ)), Perenti Global ((PRN)) and Woodside Energy ((WDS)) hold AGMs 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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