The Overnight Report: Baring Its FANGs

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By Greg Peel

When is a pause not a pause?

I was of the opinion that a pause in rate hikes this month was to allow the lag effect on the economy, agreed to be 6-12 months or more, to catch up somewhat and thus inform the RBA whether or not further rate hikes are necessary, and that one month is hardly a sufficient gauge. Based on the minutes of the April meeting released yesterday, that is not the case.

“Members recognised the strength of both sets of arguments, but, on balance, agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings.” [My emphasis]

In other words, it was a close call, but surely “meetings” imply more than one, and thus a “pause” would have to be for longer than one month? Apparently not:

“Over the coming month, members observed that they would receive another quarterly reading on inflation, additional monthly readings on the labour market, household spending and business conditions, and further information on developments in the global economy and financial markets. The staff were also due to present a full set of updated forecasts at the following meeting.”[My emphasis]

“Over the coming month”, not months. It would appear those in the hike camp conceded to a pause with the caveat that if the next set of data came in hot, including next week’s March quarter CPI, then the pause camp would have to concede and another hike would be implemented.

Hence the May meeting is “live”, and we may well be back on the hiking path again. To make matters worse:

“…two other pieces of information accumulated since the previous meeting were relevant to the case for tightening monetary policy further”.

These were upgrades to estimates of population growth and the “increased risk of larger wage increases in parts of the economy, including in the public sector, later in the year,” noted ANZ Bank economists. We recall, in the latter case, the new NSW government will lift the cap on emergency service wages and the federal government seems set to increase the minimum wage.

I would expect, in the coming CPI report, goods inflation to have come down notably (fuel) but services inflation to be stable to higher (rent). With governments both state and federal unwilling to do anything immediate about rents, one wonders how another rate hike is going to help the renting population.

The governments’ preference is to build more houses, while watching building companies collapse under the weight of rate hikes.

The ASX200 had its ups and downs through yesterday session before closing down -21 points.

Energy was the hardest hit sector (-1.9%) under threat of an increased tax on oil & gas producers at next month’s budget. Note the budget is due a week after the RBA meeting.

Staples was next worst (-1.2%), followed by real estate (-0.7%). No one wants another rate hike. The Aussie ten-year yield jumped 11 points and the two-year 12 points.

Only two sectors closed in the red, being materials (+0.3%), which fought among itself (even the lithium miners fought among themselves) and utilities (+0.7%), but not due to the big power providers.

In other news, China’s March quarter GDP showed 4.5% year on year growth, up from 2.9% in the prior quarter and beating forecasts closer to 4.0%.

Month of March industrial production rose 3.9% (year on year), up from 2.4% in January-February but below expectations based on China’s reopening.

Retail sales rose 10.6%, up from 3.5%, and beating expectations of 7.8%. Makes a difference when you’re allowed to leave your flat.

Fixed asset investment slowed to 5.1% year to date from 5.5%, when 5.7% was forecast.

Wall Street has closed flat but our futures are up 9 points this morning.

Netflicked

Traders on Wall Street spent last night’s session reading the paper, doing the crossword, playing Angry Birds, arguing about whether the Fed will pause or hike next month – anything other than actually trade. Or so it seemed.

They were waiting for the aftermarket earnings release from Netflix.

Netflix is the first of the FANG & Co stocks to report this season, with the rest to follow in the next days and week. It has been these stocks that have led the S&P500 from last year’s low back to towards the top of its range, posting enormous 2023 gains (from what were comparatively very low bases).

Netflix, for one, is up 100% from its low. One would assume it needed a pretty pristine result to encourage further buying. As it was, guidance disappointed, and Netflix immediately fell -10% in the aftermarket.

But sell first and ask questions later is not always the most sensible policy, even if you are a computer, and after investors had had more time to wade through the numbers, it was decided the result and guidance were not so bad after all.

As I write, Netflix is down -0.8%.

Results released during the session provided mixed but unremarkable responses. Bank of America rose 0.6%, Goldman Sachs (Dow) fell -1.7%, and Johnson & Johnson (Dow) fell -2.8%. Goldman is the second highest nominally priced stock in the Dow at present so it was a drag nonetheless. J&J’s at the lower end.

There was inevitably more Fedspeak last night.

The Atlanta Fed president and FOMC member called for one more hike then a pause, which is the general expectation.

The St Louis president wants three more hikes, but he’s not a voting member.

Commodities

Supply disruptions in China due to problems with hydropower mean hefty shortages of aluminium this year, it was suggested last night, which are likely to offset slow demand growth and help bolster prices.

Smelter shutdowns in Europe due to high energy prices over the past couple of years, and consumers shunning Russian metal, make the problem particularly acute in the region.

The Aussie jumped yesterday on the RBA minutes but its gain to now at US$0.6730, up 0.4%, is supported by a -0.3% fall in the US dollar.

Today

The SPI Overnight closed up 9 points.

The Fed will release a Beige Book tonight.

Atlas Arteria ((ALX)) reports quarterly traffic numbers.

The Australian share market over the past thirty days…

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