The Overnight Report: Fed On Notice

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

By Greg Peel

Damp Squib

And the winner is…

“The Board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt. The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook.”

Woohoo! But:

“The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.” [My emphasis]

Not over till it’s over; fat lady hasn’t sung, day ain’t over yet…

The RBA statement went on to recognise problems in the global banking system that could lead to tighter credit conditions, but underscored the strength of the Australian banking system. The board further recognised high inflation, higher interest rates and declining house prices are leading to a “substantial slowing” in household spending.

Not acknowledged in the statement, but likely noted in the meeting, was the recent collapse of two more major building companies.

The board did acknowledge the labour market remains tight.

Those hoping that a pause would mean an end to rate hikes will be disappointed. The stock market was underwhelmed. Having barely moved all morning the ASX200 was down -6 points at 2.30pm, and closed up 13.

Last night Wall Street slipped and our futures this morning are down -13.

Materials was a drag on the index (-0.9%), with falls in iron ore and lithium prices offsetting strength in gold (which last night reached US$2000/oz). Utilities was the only other sector to close in the red (-0.5%).

The biggest mover on the day was energy (+1.3%), which was underwhelming considering the 6% jump in oil prices overnight, but energy did jump substantially on Monday.

Technology posted the only other move of note (+1.2%), defying a pullback for the Nasdaq and looking to a -6 point fall in the Aussie ten-year to 3.26% and -8 points in the two-year to 2.90% — well under the RBA’s paused cash rate of 3.60%.

The question the market needs to ponder is whether the relief of a paused cash rate offsets the reason behind the pause – the pending impact of rate hikes as the economy catches up. The limp stock market response tells the tale. From here it will all depend on the data, with a critical measure being the March quarter CPI later this month.

Philip Lowe will speak today, so perhaps more insight may be provided.

Jolted into Reality

Speaking of the effect of rate hikes on an economy, the number of US job openings in February fell to a 21-month low according to the Job Openings & Labour Turnover Survey (JOLTS). There were 9.9m openings, fewer than analyst expectations for 10.5m, and down from 10.6m job openings in January.

Factory orders for manufactured goods fell -0.7% in February to mark the third decline in the past four months. Economists had forecast -0.6%.

As for the banking crisis, JPMorgan CEO Jamie Dimon’s annual letter to shareholders suggested:

“The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks).”

Not overly reassuring.

All feeds into the debate that will rage on until early May. Will the Fed pause? Apparently that’s what the Bank of Australia did last night.

After surging through the 4100 level in the relief rally following the banking crisis, the S&P500 last night fell back and stopped at exactly that level.

With the JOLTS showing indications of a slowing in the labour market, the US ten-year yield fell -8 points to 3.34% and the two-year -16 points to 3.82%. The Fed’s cash rate is 5.00% (top end).

No help for the Nasdaq. All three indices fell uniformly last night by -0.5%, suggesting caution is creeping in. The next big data release will be the March jobs report on Friday.

And Wall Street will be closed.

Commodities

The number of note above is the gold price crossing US$2000/oz for only the second time in history – the last being August 2020. By December 2021 gold was just over US$1000/oz.

Silver’s suddenly woken up from hibernation.

The jump in gold follows falls in US yields and the US dollar, down -0.5%. In a rare occurrence, the Aussie is also down -0.5% at US$0.6758, thanks to Phil.

Today

The SPI Overnight closed down -13 points.

We are now trundling towards Easter, which leads into school holidays, and ends with an unofficial Anzac Day long weekend. Barring anything from left field, the market may get a little slow, at least until US companies start reporting earnings.

The RBNZ is meeting this morning. Another 25 point hike is expected, but we’ve seen that movie before.

Philp Lowe will speak.

China is closed today for tomb-sweeping day, as you do.

The US will see numbers for private sector jobs and trade tonight.

Scentre Group ((SCG)) and Novonix ((NVX)) hold AGMs today, Spark NZ ((SPK) hosts an investor day, and ARB Corp ((ARB)) is one company going ex today.

The Australian share market over the past thirty days…

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