The Overnight Report: Paying Up

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            [7] => ((VUK))
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This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Pay Rise

After slipping a bit at the open yesterday the ASX200 was back to square by 11am, ahead of the release of the September quarter wage price index. Two hours later the index was down -40 points.

Following two hikes of only 25 points, and positive signs on the US inflation front, it was assumed there might be a chance the RBA would pause in December. Not anymore.

Wages rose a decade-high 1.0% from the June quarter to an annual growth rate of 3.1%, compared to 0.8% and 2.6% in June. While numbers only slightly beat expectations, they are enough, it is assumed, to lock in another 25 point hike next month.

The result appeared to have upset the stock market more so than the bond market. The ten and two-year bond yields both fell -3 points yesterday, but the banks fell -1.0%. This was exacerbated by some mixed responses to Commonwealth Bank’s ((CBA)) September quarter update, which featured solid growth in margins but increasing bad debt risk. CBA fell -1.8%.

Utilities (-1.5%) and discretionary (-1.3%) were the worst performers, as they would be on higher rate expectations. For some reason real estate has gone the wrong way these past couple of sessions. It rose 0.4%.

Resource sectors again proved the offset, with materials up 0.7% and 1.2%. Materials had to balance strength in non-gold miners, three of which made the top five index winners, and weakness in gold miners, four of which made the top five losers.

There were also mixed responses to the day’s earnings reporters.

Hot on the heels of a shocker from agri-peer Elders ((ELD)) this week, Nufarm ((NUF)) rose 8.9% yesterday to top the index. GrainCorp ((GNC)), however, fell -2.0%, after reporting a 170% increase in profit and 50% increase in dividend.

Aristocrat Leisure ((ALL)) fell -5.0% after issuing no guidance. Pokies are under attack.

KMD Brands ((KMD)) rose 4.2% and is “cautiously optimistic, with the potential of high inflation and rising interest rates impacting consumer sentiment”.

After another weak, Fedspeak-driven session on Wall Street, our futures are down -13 points this morning. We, including Wall Street, appear now to be in a post US CPI hangover, waiting for the next signal.

Today’s local jobs data will be closely watched.

Off Target

NATO has now decided the Russian-made missiles that hit Poland were Ukrainian defence missiles. Whether or not that’s true, it’s the best way to prevent escalation.

We recall that earlier in the year both Walmart and Target (US) issued profit warnings and suffered substantial share price falls, revealing they were both stuck with lockdown-era inventory they were struggling to shift.

Walmart reported September quarter earnings on Tuesday night and rose 6.5%. Target reported last night and fell -13%. The fall was as much about the company’s outlook of a dour Christmas quarter ahead, as consumers rein in the spending.

Walmart is a supermarket plus a Target, basically. The difference in the two results is put down to food, that we must buy, and everything else we don’t have to.

Yet US retail sales rose 1.3% in October – the biggest increase in eight months – ahead of 1.2% forecasts. The Fed wants to see consumers backing off.

But are consumers really still spending solidly, or are they just paying higher prices? Retail sales are up 8.3% year on year and inflation is up 7.7%. Food inflation is still running at around 10%, with no sign of easing. Unfortunately the data do not break down price and volume.

And retail sales include fuel purchases.

Our new mate, Fed governor Chris Waller, was back home last night to reiterate what he said in Sydney on Monday – don’t think one good inflation print is going to sway the Fed. He did note recent data suggest the pace of hikes could be dialled back.

San Francisco Fed president Mary Daly does not disagree, but warned last night the possibility of a pause in rate hikes is not even being discussed by the FOMC. While the pace might slow, the end target remains the same – getting the cash rate into restrictive territory, which Daly suggests would be somewhere between 4.75% and 5.25%.

If we assume 5.00-5.25%, and a 50 point hike next month, as everyone does, then that’s 75 points more in 2023, be that 50-25-25 or a series of 25s.

The US bond market has switched focus from Fed rate hikes implying higher yields at the long end to Fed rate hikes causing recession. The ten-year yield fell -11 points last night despite the strong retail sales number. At -67 points, last night’s closing two-ten year yield spread is at its greatest inversion since 1982.

Commodities

Commodity prices will not gain traction until China stops locking down cities. Given footage of riots in Guangzhou yesterday, you’d think something must soon break.

Despite the stronger than expected wage price index, the Aussie is down -0.5% at US$0.6743.

Today

The SPI Overnight closed down -13 points.

October jobs numbers out today.

The eurozone reports its CPI.

The US will see housing starts.

There are a lot of AGMs today.

Webjet ((WEB)) and Virgin UK ((VUK)) report earnings.

Westpac ((WBC)) goes ex-dividend.

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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