The Monday Report – 31 October 2022

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Wholesale Pain

Australia’s producer price index rose 1.9% in September when 1.5% was expected, to take the annual rate to 6.4%, up from 5.6% in June.

That’s one reason the local market, which had already opened lower after Thursday’s rally, fell -0.9% on Friday. Following on from the hot CPI result, economists are more confident the RBA will hike by 50 points tomorrow despite the October 25 point “pause”.

Here’s the breakdown from the ABS of the main contributors to PPI growth:

-Output of building construction (+2.8%), due to continuing skilled labour shortages, high freight costs and timber and metal supply constraints.

-Heavy and civil engineering construction (+2.6%), due to an increase in prices for diesel and construction materials, ongoing labour shortages and high import costs.

-Electricity, gas and water (+9.8%), due to annual electricity supply costing reviews, reflecting high wholesale electricity costs and large rises in electricity futures prices.

Inflation is not going away in a hurry. It was rather perplexing therefore that the Aussie ten-year yield fell -10 points to 3.73% on Friday when one might expect a rise. However, global bond yields had been falling all week, so that influence clearly was too strong.

The Aussie also fell -0.8% when, again, a hot PPI might suggest the opposite. But that was down to the day’s other news.

Chinese steel exports fell -20% in September from August. Spot iron ore took a dive and the local materials sector fell -4.0% to be the standout drag on the index. BHP Group ((BHP)) fell -5.0%. Fortescue Metals ((FMG)) fell -8.2%. BHP’s fall alone was worth -30 index points.

Of course, it’s all a bit moot, as so often is the case lately. Wall Street surged on Friday night and our futures were up 92 points on Saturday morning.

Take out the fall in materials on Friday and other sector moves were mixed.

The PPI result appeared to have impacted on consumer discretionary (-0.8%) but not on real estate (+1.2%) or utilities (+1.1%) given the fall in yields. Technology (-2.2%) was likely spooked by the shocking results among US Big Tech names.

Energy was down slightly (-0.5%) on further falls in thermal coal prices.

Biggest loser on the day was AI company Brainchip Holdings ((BRN)), down -21.2% on a weak quarterly update.

It appears we’ll be rallying hard today ahead of the RBA tomorrow, when all will be revealed.

Living in the Seventies

US personal consumption & expenditure inflation rose 0.3% in September from August for an unchanged annual rate of 6.2%.

The core PCE – the Fed’s preferred measure – rose 0.5% as expected to take the annual rate up to 5.1% from 5.0% in August, although 5.2% was expected.

So inflation is still rising, but is it at least plateauing? Either way, Wall Street believes nothing less than the Fed will hike by 75 points this week. All that matters is any indication of an easing of the pace thereafter.

So inflation was not the big market mover on Friday night, although after falling all week US bond yields bounced back, with the ten-year up 7 points to 4.01%.

The big mover were earnings.

We recall that after reporting in Thursday night’s aftermarket, Amazon saw an initial response of down -17% while Apple (Dow) only fell -1.5%. It appears investors had more of a rethink on Apple overnight, as it surged 7.6% on Friday night.

Amazon trimmed its loss to -6.8% and Intel (Dow), which reported earlier in the week, jumped 10.7%.

America’s biggest company – Apple – is in all three indices and their similar rallies on Friday night told the story. There were also solid rallies from Exxon and Chevron (Dow) on earnings results but these were to be expected.

With one more trading session left in the month, the Dow is on track to post its best month since 1976, and its best October ever.

This feels very much like July. We saw a 10% snap-back rally in July until the S&P500 reached its 200-day moving average, and then Jerome Powell gave Wall Street a scathing rebuke at Jackson Hole for assuming the Fed was ready to start easing the pace.

Why have we seen this latest rally? Because Wall Street assumed the Fed is ready to start easing the pace. Not this week – 75 points is baked in – but perhaps from December. On Thursday morning our time, Jerome Powell will either hint at some confirmation of this assumption, this time, or shoot Wall Street down once more.

Another point of focus in the PCE data was a 0.6% increase in personal consumption when 0.4% was forecast. The US consumer is holding up, which is not what the Fed wants.

The employment cost index rose another 1.2%, as expected. Again, not what the Fed wants. At least the annual rate dipped to 5.0% from 5.1%.

This week is the biggest for US earnings reports by number of reporting companies.

Commodities

The US dollar was modestly higher on the PCE numbers, but all commodity prices have taken a hit. This is likely due to a read-through of the big fall in Chinese steel exports to China’s commodities demand in general.

The LME is still agonising over whether to ban Russian trade, as that is where China has come to buy its copper and other metals.

The Aussie is down -0.8% despite the hot PPI number, on the iron ore price fall in particular.

The SPI Overnight closed up 92 points or 1.4% on Saturday morning.

The Week Ahead

The Fed statement is due on Wednesday night.

US jobs numbers are out next week, but non-farm payrolls will follow the Fed meeting.

The Bank of England meets next week – the first under the new new prime minister. The eurozone reports September quarter GDP.

China reports October PMIs on Monday, while the rest of the world reports manufacturing on Tuesday and services on Thursday.

Australian data releases net week include retail sales, private sector credit today, building approvals on Wednesday and trade on Thursday.

Tuesday is Cup Day, so Victoria is closed, and the RBA will deliver the rate that stops the nation.

There are still plenty of AGMs and quarterly reports to get through in the local market next week, but not nearly as many as this week.

CSR ((CSR)) reports full-year results, while Amcor ((AMC)), News Corp ((NWS)), REA Group ((REA)), Pendal Group ((PDL)) and Block ((SQ2)) all report quarterly earnings.

The Australian share market over the past thirty days…

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