The Overnight Report: Mixed Messages

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            [3] => ((NWL))
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This story features CHAMPION IRON LIMITED, and other companies.
For more info SHARE ANALYSIS: CIA
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Enthusiasm Holding

The ASX200 did not close on its high yesterday, slipping back in the afternoon to a close of up 34 points having peaked late morning up 61, likely reflecting some caution ahead of last night’s US CPI data, and perhaps today’s local jobs report.

The 61 point gain followed 90 points on Tuesday, and the futures showing only up 25 yesterday morning. It all seems a bit over-enthusiastic, except that last night the S&P500 closed down -0.4% and our futures are down a mere -3 points this morning.

Materials continued to lead the charge (+1.4%) despite some give-back in smaller names of Tuesday surge. All top five index losers were resources stocks yesterday but with Cyclone Isla set to shut down shipments out of Port Hedland, the implication for iron ore prices meant iron ore miners were strong. Smaller pure-play Champion Iron ((CIA)) jumped 7.0% as it operates outside Australia.

Tech also made a comeback (+1.4%) despite more weakness in the Nasdaq, after NextDC ((NXT)) revealed a solid rise in customer contracts at its Sydney data centre. It rose 8.1%, and Megaport ((MP1)) rose 7.7% in sympathy.

Next best was staples (+0.6%) followed by healthcare (+0.5%), suggesting it has not been purely a cyclicals-based rally this week.

The IMF downgraded its global growth outlook overnight but has a habit of telling us what we already knew, a while back. Energy fell -0.3% yesterday and utilities -0.4% despite higher oil prices.

The IMF also says the level of risk in Australia's housing market is the second-highest in the developed world (Canada), warning of a “wave” of mortgage defaults. We rather knew that too. The banks fell back -0.1% after jumping on Tuesday.

Bond yields ticked up slightly again yesterday, with the Aussie ten-year up 2 points to 3.24% and the two-year up 4 to 2.91%.

What happens next was dependent on US inflation and the minutes of the last Fed meeting.

At Odds

The US headline CPI fell to 5.0% in March from 6.0% in February, slightly better than a 5.1% forecast. But the fall was mainly driven by lower energy prices, with WTI dropping under US$70/bbl during the month. It’s now back at US$85/bbl.

The numbers are also now cycling the surge inflation one year ago. Food costs actually fell – for the first time since 2020.

The core CPI rose to 5.6% from 5.5% as forecast. As the Fed had noted in its March statement, goods inflation is coming down but services inflation remains sticky.

The numbers did not move the dial on May expectations for the Fed, which remain at around a 75% chance of another 25 point hike.

The minutes of the March Fed meeting rather threw the cat among the pigeons.

“Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”

Note this is the Fed staff – not the FOMC made up of regional Fed presidents that make the policy decisions. The staff also saw inflation falling rapidly this year and easing further next year.

The minutes noted that “many” Fed officials (FOMC) said the likely effects of the banking stress had led them to lower their estimate of the peak interest rate that would be needed to bring inflation under control. However, in the wake of last night’s CPI data, the Richmond Fed president told CNBC last night that while peak inflation may be behind the US, “we still have a ways to go”.

The Fed is separating the two issues – bank crisis and inflation. The former it assures can be controlled with other “tools”, while the latter still needs to be attacked with rate settings. Never mind that higher rates are what caused the former in the first place. Wall Street is not entirely sure what these “tools” are, but remains cautious on the banking sector, particularly the regional banking sector, and particularly if rates keep rising.

Yet many agree the stock market is not pricing in a recession. The bond market is, as are Fed funds futures, which continue to predict Fed rate cuts later this year as a recession bites.

Earnings forecasts are too high, and the PE multiple (currently 18x for the S&P500) is also too high, in many an opinion. If earnings (E) disappoint over the next few weeks, prices (P) will need to fall to bring the PE down to something more realistic when recession is a threat. And 18x is above average.

The banks kick off earnings season from Friday night. In the spotlight will be not just earnings, but deposit outflows and guidance for loan growth going forward as the economy slows.

Tonight brings the March PPI numbers. On Friday it's retail sales. Data from Bank of America released last night suggest consumer spending is slowing.

Commodities

A grim warning from the IMF has not much moved the dial on commodity prices, and certainly not oil prices.

Gold continues to rally, playing inflation hedge, with US yields and the dollar down again.

The Aussie is up 0.6% at US$0.6695.

Today

The SPI Overnight closed down -3 points.

Australia’s March jobs report is due today.

China reports March trade data.

The US will see the PPI numbers.

Netwealth Group ((NWL)) provides a quarterly update, having already flagged slowing funds inflows in advance.

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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