The Overnight Report: Crisis Not Over

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This story features WOOLWORTHS GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: WOW
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Parting Shot?

“Given the importance of returning inflation to target within a reasonable timeframe, the Board judged that a further increase in interest rates was warranted today.

“While the recent data showed a welcome decline in inflation, the central forecast remains that it takes a couple of years before inflation returns to the top of the target range; inflation is expected to be 4½ percent in 2023 and 3 percent in mid-2025.”

The problem is:

“…services price inflation is still very high and broadly based and the experience overseas points to upside risks. Unit labour costs are also rising briskly, with productivity growth remaining subdued.”

And don’t think this one will be the last:

“Some further tightening of monetary policy may be required to ensure that  inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.”

With that the ASX200 fell off a cliff to be down -86 points before recovering to close down -67. Philip Lowe has ignored the politics, and the subsequent RBA restructure, and done what he thought was his job, whether or not he’s around to see the end result.

Technology (flat) was the only sector spared in a sea of red yesterday. The Aussie two-year yield pretended to be a bank and passed on (almost) all the hike, in rising 24 points to 3.28% (cash now 3.85%). The ten-year rose 12 points to 3.47%.

So it was goodnight, again, for real estate (-2.1%), just when it was regaining some traction. And the consumer sectors took a hit, with discretionary down -1.0% and staples -0.9% despite a strong sales report from Woolworths ((WOW)).

The defensives of communication services (-1.8%) and industrials (-1.4%) copped a beating, while healthcare was less-bad (-0.4%) as were utilities (-0.2%).

Mixed blessings for the banks in falling -0.4%, while resources played their own game – energy down -1.5% as oil prices tumble and materials down -1.0%, with gold miners under pressure.

While oil prices tanked last night, gold shot up. The annual Macquarie Conference, at which invited companies make presentations, was not good yesterday for gold miners, nor Computershare ((CPU)), which fell -4.8% to top the index losers’ board despite higher rates.

On the flipside, attendees like what they heard from Cleanaway Waste Management ((CWY)), which rose 5.8%, pipped only by Pinnacle Investments ((PNI)), which rose 6.1% on a funds flow update.

Despite the index coming off its lows by the close, today is not shaping up well either ahead of the Fed decision. Our futures are down -41 this morning.

Not Convinced

When JPMorgan acquired First Republic Bank on Sunday night (US), the pundits were surprised that on Monday night there was no relief rally among US regional banks, rather modest falls. The problem was JPMorgan did not actually acquire the bank, just its deposits. Stock and bondholders were wiped out.

By last night that issue had generated a return to fear, despite Jamie Dimon declaring the crisis over. Regional bank shares tumbled once more, having already significantly de-rated thanks to SVB.

We recall that last week, as First Republic hit the skids, another West Coast bank – PacWest Bancorp — reported an earnings inflow in March and rallied 14% on the day, implying First Republic, like SVB, was simply an outlier.

Last night PacWest fell -28% to be the worst performer among a string of bank sell-offs.

Fuelling the fear is the expected 25 point hike from the Fed tonight. This will only suck more deposits out of banks and into money market funds that track the cash rate and thus pay a higher yield.

Not helping either is the hackneyed debt ceiling issue. Janet Yellen has warned the government will run out of money by as early as June 1. There are only eight joint sitting days in Congress in between to pass a bill either raising or suspending the ceiling. That said, we’ve been here many times before, and every time brought a minute-to-midnight resolution least the US defaults on its debt.

But never before has the gap between the two parties been so yawning. One the one side we have a defiant Joe Biden, and on the other, far right Republicans so determined to make their mark it took fifteen votes and a lot of concessions for Kevin McCarthy to be elected speaker.

Wall Street is worried.

So are oil markets. It is the debt ceiling issue that has been attributed to last night’s -5% plunge in oil prices, along with China’s weak economic data.

In economic news, job openings fell to a near two-year low of 9.6m in March in a sign the US labour market is gradually cooling off, and recession might be next. Yet competition for workers remains intense and is adding to upward pressure on wages and inflation. See: stagflation.

US factory orders (ex-aircraft) fell -0.7% for the second straight month.

On the bright side, Uber reported earnings last night and jumped 11%.

Not so bright were the fortunes of direct-to-student learning platform Chegg, which issued a revenue warning based on the expected damage to be caused by ChatGPT and AI in general. It fell -48%.

After the bell, Starbucks reported a beat on revenues and earnings and is down -5%. Ford (Dow) reported a substantial beat in revenues and earnings and is down -2%.

Commodities

Base metal trading was back last night but nothing to write home about.

A rollover to a new futures month for iron ore has resulted in a 2% gain, but a net -US10/t rebasing.

Renewed bank fears, and recession fears in general, had the US ten-year yield down -14 points last night and the two-year -16 points, which fired up gold.

Note that the two-year is at 3.98%, and assuming a hike tonight, the Fed funds rate would be 5.00-5.25%, highlighting the disparity in the views of the Fed and the market.

Thanks to the surprise rate rise, the Aussie is up 0.5% at US$0.6667.

Today

The SPI Overnight closed down -41 points or -0.6%.

Most of the world will see April services PMI numbers today.

Australia will see March retail sales, which might be interesting now the RBA has hiked again.

China and Japan are both closed today.

Along with the Fed decision, the US will see private sector jobs.

Amcor ((AMC)) reports March quarter earnings.

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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