The Overnight Report: Odds Of Pause Tighten

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            [1] => ((WTC))
            [2] => ((IAG))
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            [1] => WTC
            [2] => IAG
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This story features MEGAPORT LIMITED, and other companies.
For more info SHARE ANALYSIS: MP1
The company is included in ASX200, ASX300, ALL-ORDS and ALL-TECH

By Greg Peel

Unresourceful

As market participants trickled back from the long weekend, the ASX200 opened weakly yesterday and looked lost before 11am, when it decided to gradually rally.

The rally could have been a lot more significant were it not for falls in the resource sectors – the only sectors to fall bar real estate. Energy dropped -1.3% on a mix of sharply lower oil prices and an announced increase to the Queensland government’s coal production royalty. Materials fell -0.8% on weaker metals prices.

Yet oil has snapped back overnight, metals prices are higher, and if we throw in a soft US CPI, our futures are up 44 points this morning.

Technology stole the show yesterday (+3.8%) as the Nasdaq had posted two strong sessions in the interim, led by Megaport ((MP1)) and Wistech Global ((WTC)).

A 0.6% gain for the banks provided the greatest counter to resource weakness.

There were mixed signals emanating from yesterday’s confidence surveys. The NAB business survey for May showed business conditions falling to a reading of +8 from +15 in April, and confidence falling to -4 from 0.

“Business activity has been incredibly resilient throughout this tightening cycle,” noted ANZ Bank’s economists in response, “with most indicators performing well above historical levels. However, NAB’s May report showed business confidence, forward orders and stocks are now below their long-run average levels. The dip in forward orders points towards further declines in business conditions.”

But Westpac’s consumer confidence survey for June showed the consumer sentiment index rose 0.2% to 79.2 from 79.0 in May – positive, but still near recession lows. The interesting point is that the business survey was conducted before the June RBA rate rise and the consumer survey after.

Consumer discretionary nevertheless rose 0.9% in response, and staples were up 0.7%, while healthcare and communication services rose 1.0%.

The other news of the day was that the PBoC cut its seven-day interest rate by -0.1% to 1.9% to mark the first reduction since August 2022. It’s a small step towards Chinese stimulus, and a fiscal response is still MIA, but maybe we’ll see some action after tomorrow’s May data-dump.

Meanwhile, with commodities prices flipping over last night on that news (and yesterday for iron ore), that 44 point futures gain is well supported.

Closing in on Restrictive

The US headline CPI rose 0.1% in May and dropped to an annual rate of 4.0% from 4.9% in April, to its lowest level since March 2021. Core inflation remained stickier, rising 0.4% to take the annual rate down to 5.3% from 5.5%, although also the lowest level since March 2021.

The current Fed funds rate is 5.00-5.25%. One more month of slippage in the core rate and Fed policy will be moving into restrictive territory in its battle against inflation. The Fed nevertheless prefers the core PCE measure of inflation, but in April that came in at 4.7%.

Wall Street is now pricing in a 90% chance of a Fed pause tonight. The odds for July have now flipped over to 60% chance of a pause rather than a hike. Investors are beginning to feel maybe…just maybe… the Fed might even be done now. If not, there would only be one more 25 point hike on the cards.

Which is underscoring this “new bull market”. There are still plenty of naysayers – those suggesting the further this rally runs the greater the chance it will all fall over – but there is also an ever-growing cohort of those believing this might just be a new bull market after all.

There must be – otherwise Wall Street would not be pushing higher.

Supporting the bulls is increasing evidence of market breadth, with more sectors participating in the rally, across the spectrum, than just AI-inspired tech. The Nasdaq once again outperformed last night, even as bond yields rose on easing recession expectations, but not by a standout amount.

The bulls are looking for tech not to correct, but for the rest of the sectors to catch up. The bears see the opposite.

Assuming the Fed does pause tonight, how Wall Street responds will come down to the accompanying rhetoric. If it’s a case of “we’re pausing this month but don’t think for a moment it’s all over yet,” then with a pause 90% priced in, we may see some profit-taking.

Even if the Fed pauses in both June and July, thereafter follows August, which does not have a Fed meeting but does have Jackson Hole, which Jerome Powell uses to berate Wall Street for being a bunch of fools.

We can now only wait for tonight.

Commodities

A little bit of Chinese stimulus is always a good thing.

We note that Monday night’s fall in oil prices were all about a forecast downgrade from Goldman Sachs, and one of the reasons given was lack of Chinese growth.

Gold did not nevertheless like lower inflation and higher US yields.

The US dollar fell back -0.3%, despite said higher yields, as rate hike expectations ease. The Aussie is up 0.3% at US$0.6770 and still climbing.

Today

The SPI Overnight closed up 44 points or 0.6%.

The US May PPI is out tonight, ahead of the Fed rate decision.

Insurance Australia Group ((IAG)) hosts an investor day today.

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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