The Overnight Report: Good To See You Back

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

By Greg Peel

Resourceful Data

The ASX200 opened its account for the month of March by falling -42 points in the first hour. Part of that fall was due to end-of-month selling on Wall Street on the last day of February, and part of it was to account for the longest list of stocks to date going ex in the now increasingly busy ex-dividend season.

Around half an hour later the index was back to square, it managed to gain around 10 points in the afternoon but then copped some market-on-close selling on the death. Three economic data releases through the morning turned the index around.

Number One: The ABS reported a plunge in Australia’s headline CPI to an annual 7.4% from 8.4% in December. While the housing segment rose 9.8% (year on year), food and beverages 8.2% and recreation 10.2%, all showed a slower pace of growth than in December. The market had forecast a fall in CPI only to 8.0%. But…

“The Monthly CPI Indicator can be very volatile month to month as it is not a true monthly price index but rather the release of data for the quarterly CPI as it becomes available,” noted Westpac’s senior economist yesterday, “hence it can be very volatile month to month depending on the timing of the price surveys”.

Nor does the ABS calculate an interim core CPI, which is the RBA’s benchmark. Conclusion: Don’t think this result will necessarily shift the RBA. Although…

Number Two: Ahead of yesterday’s December quarter GDP release, economists had adjusted their forecast to expect 0.8% quarterly growth for 2.8% annual growth. The numbers came in at 0.5% and 2.7%.

“Today’s report suggests the economy is slowing under the weight of higher prices and interest rates,” suggested ANZ Bank’s economists, “with consumer spending recording outright falls in two states. Inflationary pressures, while past the peak, remain strong”.

Most surprising was growth in wages, or lack thereof. Growth in average non-farm earnings per hour (the RBA’s preferred measure of broader labour costs) was 0.0% in the quarter, leaving annual growth at just 2.9%. The RBA has forecast 4.7%.

Yet there was hardly a company this past December-half reporting season that did not cite labour shortages as an issue. Maybe they just weren’t offering enough pay.

The GDP result overall, nevertheless, does provide the RBA with food for thought.

Number Three: The Chinese manufacturing PMI rose to 52.6 in February from 50.1 in January. The Services PMI rose to 56.3 from 54.4. China is baaack! Or maybe not. China’s Minister of Finance responded the recovery was still not stable and the government would expand fiscal spending this year and encourage investment.

Even better.

So how did all of this affect the stock market? Noting that the Aussie ten-year yield fell -7 points to 3.78% and the two-year -8 points to 3.50%?

Energy sector up 1.6% and materials 2.3%. Every other sector down. The biggest move was in communication services (-2.3%), but then Telstra ((TLS)) went ex. Real estate lost -1.7% despite the move down in yields, without any major ex-dividends.

Analysts have suggested the peak is past for bank net interest margins, as competition forces deposit rates to rise and bad debts become an issue. But what if interest rates don’t rise as much as the RBA has been warning? Financials fell -1.2%.

Staples fell -1.0% on the suggestion food inflation is easing.

There were other clear ex-div effects in other sectors, although their falls on the day were more modest.

So what will we do today? The futures are down one point.

The Bridge Too Far

The US stock market wasn’t entirely sure how to open its account for March following end-of-month selling on Tuesday night, but the US bond market had clearly made up its mind. Without any major US economic data releases on the day, the ten-year yield rose 9 points to 4.00%.

It managed to close at 3.99%, but the stock market got the point, sending the S&P500 down another -0.5%.

One data release that was at least notable last night was the US manufacturing PMI for February, which rose to 47.7 from 47.4. This indicates only a slight easing in the pace of deterioration, and forecasts had 48.0.

Wall Street was nonetheless buoyed by the Chinese numbers. But those yields, driven by expectations of a still-hawkish Fed (and the possibility of a return to a 50 point hike at this month’s meeting), are just a bit much.

At today’s levels, fixed income is rapidly becoming a more attractive investment alternative than risky stocks. The two-year bond will pay you 4.89%. It’s taxed, but then so are dividends taxed in the US (no franking).

It has already been suggested that 4% may be the line in the sand for the US ten-year. If Fed policy suggests rate hike expectations are set to rise ever higher, recession expectations fire up. That would stop the ten-year yield in its tracks.

But would not be good for stocks.

Commodities

See: China

The Aussie has rocked and rolled over the past 24 hours, falling on the local CPI and GDP numbers, then rallying on the Chinese data (and subsequent jumps in commodity prices) and a fall in the US dollar (despite higher yields). It’s up 0.3% at US$0.6753.

Today

The SPI Overnight closed down -1 point.

We’ll see numbers for building approvals today.

Today’s list of ex-dividends is bigger still than yesterday’s, and includes Coles ((COL)) and Woolworths ((WOW)).

Note that futures do not pay dividends, hence futures prices do not reflect dividend adjustments.

The Australian share market over the past thirty days…

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