The Overnight Report: Beyond 4000

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By Greg Peel

Glass Half What?

Following Tuesday’s M&A frenzy, the ASX200 opened around -20 points lower yesterday until the release of the February CPI data turned the tide late morning.

Annual headline inflation fell to 6.8% in February from 7.4% in January, providing more impetus for the RBA to pause its rate hikes next Tuesday. The board has already indicated a pause is near in order to let the impact catch up, and in between we had a global banking crisis.

The core rate fell to 6.9% from 7.5%.

Hence, most in the market believe a pause is nigh, and the futures are pricing no hike. ANZ Bank economists disagree, believing next week will bring another 25 point hike.

Firstly, 6.8% is lower than 7.4% but 6.8% still shows inflation momentum remains strong, suggests ANZ. And the pace of reduction has decelerated (Dec 8.4, Jan 7.4, Feb 6.8).

Moreover, the February jobs numbers showed a large bounce and a fall in the unemployment rate back to 3.5%, the latest NAB business survey showed conditions remain strong, cost growth remains elevated and the labour market tight, and while retail sales were softer in February, spending on services remained solid.

Furthermore, the banking crisis was centred in the US and Europe, and in the wake the Fed, ECB, Bank of England and Swiss National Bank have all hiked rates, implying nothing to see here.

So, is 6.8% a glass half full or a glass half empty?

Suffice to say, Aussie bond rates barely moved in response, but they are down over -50 points in a month. The Aussie dollar rallied into the CPI release, then fell back to where it was thereafter.

In the stock market, the net gain for the index was resources-driven, with energy up 1.2% and materials up 1.3%. A lift in iron ore prices offset some retreats in lithium miners after Tuesday’s riot, and weakness in coal miners.

Gains in other sectors were less significant, while real estate fell back -0.8% after rallying on Tuesday despite higher bond yields, healthcare lost -0.4% after also falling on Tuesday, presumably providing funding for investment in resources, and the banks fell back -0.5% after a solid gain on Tuesday.

UBS yesterday cut earnings forecasts, targets and some ratings for individual banks (including to Sell) citing the ramifications of said global banking crisis.

The index now appears stable above 7000 which should flip that level to support. With Wall Street strong overnight, our futures are showing up 48 points this morning.

Pity that Wall Street’s rally was all about Apple and Microsoft.

Tech is Back

US technology stocks surged out of covid in 2020, became the investment of choice in 2021, and then collapsed in 2022 as the Fed started hiking rates. With a pause in Fed rate hikes possible as soon as May, tech is back, particularly Big Tech.

Last night chip-maker Micron surged 7% after posting a greater than forecast quarterly loss and greater than forecast write-down of excess chip inventory. The rally was based on the CEO calling the bottom, and on anything AI now being the new black.

But the real driving force were 2% rallies for both Apple and Microsoft as they continue to power ahead as safe haven cash machines, even if they can still be growth stocks. The big wipeout in US bond yields has clearly helped, and at in excess of US$2trn market caps each, Apple and Microsoft together make up 15% of the S&P500.

Even more of the Nasdaq 100 – the main tech index – and both are the only two Big Tech stocks in the Dow. So when they rally, all three indices rally.

Throw in 2% gains for Meta and Netflix last night, and 3% for Amazon, and not much else matters.

US yields barely moved last night.

Still, every S&P500 sector closed in the green as optimism improves each day there’s no news of another bank blow-up. It doesn’t mean there won’t be, but investors are happy to assume the Fed and other regulators have the situation ring-fenced.

And the US consumer is still alive a well. Last night trendy athleisure-wear retailer Lululemon reported earnings and jumped 13%. Lulu’s sales shot up during covid lockdowns as everyone rushed to buy “track pants” and other couch-wear, and the share price fell back once lockdowns ended. But clearly this has not brought the death of the brand.

The S&P500 has now surged back over the 4000 mark, seemingly headed back towards the January peak over 4100.

In the near term we have the February PCE inflation result due tomorrow night, and into April we’ll see the rush of March quarter earnings results.

Commodities

The supposed end of the banking crisis has also led to a gradual comeback for metals prices, despite China being yet to show any great post-covid resurgence.

Tight copper inventories have that metal climbing quietly most days recently.

Oils have given a bit back after jumping earlier in the week on Kurdish supply issues.

The Aussie is down -0.4% on a stronger greenback (suggesting little net impact from the CPI result).

Today

The SPI Overnight closed up 48 points or 0.7%.

Today is quarterly ex-dividend day for a large number of REITs and other funds. Don’t be put out by real estate taking a step down from the open this morning.

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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