The Overnight Report: From The Rooftops

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This story features NEW HOPE CORPORATION LIMITED, and other companies.
For more info SHARE ANALYSIS: NHC
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Cautious

“Members noted that the most important data released over the prior month – covering GDP, the labour market, wages and inflation – had all been a little softer than expected. They discussed the extent to which this should be interpreted as a signal that demand was weaker than previously assumed.

“…members noted that monetary policy was in restrictive territory and that the economic outlook was uncertain. These considerations meant that it would be appropriate at some point to hold the cash rate steady, to assess more fully the effect of the interest rate increases to date.”

Early this month, the RBA was hinting that it might just be ready to pause. Then came the strong February jobs number, followed by a solid business confidence survey, leading the market to assume there would still be at least one more 25 point hike, if not two, before the pause. But the subsequent US banking crisis has rather changed the picture.

The RBA feels a need to allow the lagged impact of rate hikes to catch up in order to fully assess the damage. The US has now seen an example of such damage, leading Wall Street to assume that tonight the Fed will go one more 25 pointer and then suggest a possible pause, despite having been relentlessly hawkish only a couple of weeks ago.

Before we get to the April meeting, we’ll see February CPI and retail sales data which will help inform a decision, and the RBA will be taking the Fed’s rhetoric tonight into its consideration.

Yesterday the ASX200 played catch-up with the rest of the world, jumping from the open and rising gradually on the RBA minutes to a peak of up almost 100 points mid-session. Then it quietly gave almost half of it back. This likely reflects caution ahead of tonight’s Fed meeting, and perhaps a fear there may be more cockroaches under the fridge.

Whatever the case, we just can’t seem to match Wall Street’s optimism, although the futures are up another 62 points this morning. That would take us back through 7000, but that level now becomes resistance.

Our banks finally shook off the fear yesterday in rising 1.2%, beaten only by consumer discretionary (+1.5%) on the hope of an RBA pause.

Bond yields moved comparatively little yesterday, allowing real estate to find its feet (+0.7%).

Materials also made a comeback (+1.0%), while a 0.9% gain for energy seemed slightly muted given oil prices stopped falling and New Hope Corp ((NHC)) jumped 8.6% on its earnings result and dividend.

Technology (flat) could not get fired up alongside the Nasdaq while the only serial loser was utilities (1.6%), with Origin Energy ((ORG)) falling -2.0%.

It also appears a pause in rate hikes means we’ll buy more pizzas. Domino’s Pizza ((DMP)) rose 5.6%.

As You Were

“The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader US banking system,” said US Treasury Secretary Janet Yellen said in a speech last night. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

In other words, Janet’s got your back. And she will remain “vigilant”.

It was enough to further ease fears around the sudden US banking crisis. First Republic Bank rallied 30%, and the regional banking ETF rose 6%.

It was good news for Wall Street all round, and the S&P500 regained the magic 4000 level. In other words, all that was lost since Silicon Valley Bank faltered. This despite bond yields shooting back up again. The US ten-year rose 13 points to 3.61% and the two-year 26 points to 4.18%.

Yet the Nasdaq jumped 1.6%. Funny old world.

With the US Treasury looking after bank deposits, the Fed is free to hike another 25 points tonight without feeling too self-conscious. Given some 86% of the market is anticipating such a hike, what matters tonight will be not what the Fed does but what the Fed says.

Less than a month ago pundits were talking a peak Fed rate of 6% or more, given stubbornly strong economic data and a stubbornly hawkish Fed. The fact the two-year yield is now trading around 4% indicates that forecast has pretty much gone out the window; 5% will likely do for now.

Aside for having previously implied two, maybe three more rate hikes to come, the Fed indicated it would be a case of “stronger for longer”. In other words it will be a long time before rates come down again.

Wall Street is forecasting -50-75 points in cuts in the second half of the year. What might the Fed have to say?

All will be revealed early tomorrow morning our time.

As a sideline, one research team pointed out that Apple and Microsoft combined now represent a full 13% of the S&P500, to mark the highest concentration of the top two stocks since 1990. Both are also Dow stocks.

Can you guess? GM and Ford, followed by Exxon.

Oh what a feeling.

Commodities

While metals prices continue to look a bit stunned, the bounce in oil prices is attributed to the easing of bank sector fears.

The bounce in US yields has brought gold back to earth a bit.

The Aussie is down -0.7% at US$0.6672 despite little movement in the US dollar, on the RBA’s hint at a pause.

Today

The SPI Overnight closed up 62 points or 0.9%.

The UK will see a read on CPI tonight, but the Fed will rather steal the stage.

Seek ((SEK)) goes ex 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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