The Overnight Report: Wholesale Exuberance

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This story features COMPUTERSHARE LIMITED, and other companies.
For more info SHARE ANALYSIS: CPU
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Not Happy Jan

A federal treasurer should typically beaming when jobs growth is surging and unemployment is at a 50-year record low but Jim Chalmers’ smile was a lot more muted yesterday as Philip Lowe winced at the March employment report.

Australia added 53,000 jobs in March when forecasts were for 20,000, and the unemployment rate remained stubbornly on 3.5% when 3.6% was forecast, with an unchanged participation rate thanks to roaring women.

The current surge in migration intended to restore post-covid population growth is not only adding to the squeeze in the rental market but to jobs growth as well.

If this report came out a few months ago there would be no doubt the RBA would be hiking again at the next meeting. As of yesterday, talk of the RBA returning to rate hikes next month was rekindled.

But really? The RBA decided to pause to allow the economy to catch up with the impact of higher rates. One month does not a catch-up make. The board may well decide to recommence tightening ahead if it determines that the economy has not been that badly impacted by rate hikes, but it’s not going to know that by May.

There will, post-meeting, be the May Budget to contend with as well.

The ASX200 opened mildly lower yesterday following weakness on Wall Street due to a stronger core CPI and mixed messages from the Fed. On the release of the jobs report, the index dropped and selling continued to a late afternoon low of down -31 points before buying re-emerged, largely after the bell.

Technology was strangely the winning sector yesterday (+1.0%) despite a fall in the Nasdaq overnight and a 4 point gain in Aussie bond yields. Computershare ((CPU)) rose 1.4% and WiseTech Global ((WTC)) 1.5%. Energy responded to higher oil prices (+0.9%), which were down last night, while the comeback for real estate continues (+0.5%).

All other sectors closed lower, led by staples (-1.2%), which seems out of place but reflects a -2.5% down, down day for Coles ((COL)) after Wesfarmers ((WES)) sold the last of its shares.

Discretionary fell a net -0.7% on rate hike fears offset by a 12.1% ascent for Corporate Travel Management ((CTD)) after it won a contract with the UK Home Office.

Materials had a down-day for once (-0.5%) as iron ore prices fell despite Port Hedland being shut down. Chinese data yesterday showed a whopping 14.8% year on year jump in exports in March and a -1.4% fall in imports.

We prefer it the other way round. But watch materials run today, particularly gold miners.

The banks were mildly weaker (-0.3%) on the prospect of another rate hike hitting borrowers.

Wall Street has rebounded solidly overnight thanks to a cooler than expected PPI, but despite a 1.3% gain for the S&P500 our futures are only up 15 points.

Heading in the Right Direction

The US headline producer price index actually fell month on month in March to mark the biggest decline post-covid crash at -0.5%. Economists had forecast 0.0%. The annual headline PPI plunged to 2.7% from 4.9%.

The core PPI rose 0.1% when 0.2% was expected, to an annual rate of 3.6%, down from 4.5%.

Red rag to a bull.

The problem is, as noted yesterday, WTI crude traded under US$70/bbl in March and is now back above US$80/bbl, raising the possibility of a tick back up in April of the headline PPI and CPI. Energy is a big part of wholesale pricing.

The drop in core PPI is more encouraging, as this should flow through to a lower core CPI ahead (which ticked up in March) unless retailers decide to hang on to better margins.

The April inflation data will not be out ahead of the May Fed meeting, although the PCE numbers, which the Fed prefers anyway, will be. We might have to wait for those to confirm whether there’s any possibility of a Fed pause, which according to Fed rhetoric, is unlikely.

Wall Street loved it of course, despite the fact lower wholesale pricing implies lower demand, thus fuelling the recession argument. Does a Fed pause offset a recession? The S&P500 is now approaching its February high, which followed the January surge out of last year’s bear market, before a hawkish Fed sparked a rollover, later exacerbated by SVB.

The S&P PE multiple is 18x, above an average of 15x, and just about anyone who opens their mouth on Wall Street believes March quarter earnings forecasts are too high.

From tonight we’ll begin to find out, as JPMorgan (Dow), Citigroup and Wells Fargo (three of the Big Six banks) report.

Commodities

The US dollar index dropped -0.5% on the PPI numbers, reawakening base metal prices. But the trade-off is the implication for raw materials of lower wholesale demand.

Gold also shot up once more, on the dollar, with US yields little changed.

The oils did not after an OPEC report released last night flagged downside risks to (northern) summer oil demand. The report highlighted rising oil inventories and a number of challenges to global growth.

Combine the dollar’s fall and strong commodity prices and the Aussie is up almost a cent at US$0.6788.

Today

The SPI Overnight closed up 15 points or 0.2%.

The US reports March retail sales and industrial production and interim April consumer sentiment tonight.

The Australian share market over the past thirty days…

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