The Overnight Report: Bullseye!

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By Rudi Filapek-Vandyck

The latest CPI print in the US has all but confirmed the peak is in the past and that is great news for risk assets as it allows the central bank to be more relaxed about inflation and adopt a gentler policy approach.

The US bond market is resetting to a more easy-going, benign pathway of further rate hikes, suggesting there might even be less than a further 50bp in additional hikes on the agenda this year.

The change in rate hike expectations seemed to receive verbal support from no less than three Fed speakers. It's on, the inflation dragon is about to be slayed. 2023 will not simply be a continuation of 2022.

In financial markets terms, the change in rate hike expectations means lower bond yields and a weakening US dollar, supporting ongoing advances for equities and commodities.

Further gains have pushed the S&P500 against the 200 days moving average, currently at 3984, while the quarterly reporting season is about to be unleashed. Banks are first up with Bank of America, JPMorgan, Wells Fargo and Citigroup all reporting before the market opens.

Never a dull day in global finance?

At face value, America's December headline CPI cooled to 6.5% from 7.1%, on lower gasoline prices (down -9.4% on a monthly basis) with core CPI printing a 0.3% monthly gain and 5.7% versus a year ago. These numbers were smack, bang on in line with market forecasts.

But there was lots of positive news beneath these headlines. The three months annualised core rate, for example, is now at its lowest reading in 15 months, at 3.14%. Splitting goods sans energy suggests inflation is a negative -4.8% annualised. And while rents are still contributing to a higher print, several indications are rents are falling and will, at some point, begin dragging down CPI readings.

US Fed Funds pricing is now signalling a 25bp hike in February, with now only a 10% chance of a 50bp hike. That compares to a 25.6% chance of a 50bp hike the day prior. US bonds are pricing in only a cumulative 46.1bps in Fed rate hikes for February and March, indicating the Fed might pause in March after a 25bp hike next month.

Locally, it's Friday, but exactly what this means in the above context remains an open question. SPI futures are suggesting buyers are lining up for a positive open.

In 2022 Australian equities (at the index level) crowned themselves champions of the world and ETF provider VanEck's forecast is this can be repeated in 2023. VanEck's favour resides with resources, REITs and consumer staples, with a neutral view on banks and a recommended underweight exposure to consumer discretionary.

The latest VanEck Australian Investor Survey revealed Australian equities are the preferred investment destination with 70% of investors planning to start or increase their allocation this year. One in two investors indicated ETFs are their preferred investment product, while 57% plans to start or increase their allocation to ETFs in 2023.

Australia remains largely on holidays, but that'll change next week and the week after as the February reporting season starts appearing on the horizon.

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

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