The Overnight Report: Hawkish Pause

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This story features CSL LIMITED.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Bloodbath

The ASX200 chopped around all day yesterday but tried to post a decent rally off the back of lower US CPI numbers, but there was one rather large problem.

The index managed only to gain 23 points when the futures had suggested 44, but a -6.9% plunge for market heavyweight CSL ((CSL)) was worth -35 points. CSL issued a profit warning, mostly blamed on currency.

So count that back and it could have been a very strong session. In Philip Lowe’s justification of the June rate hike, he did note the board was closely watching how inflation was playing out offshore.

Overlooking healthcare, which fell -4.8%, materials came roaring back (+2.5%) on Chinese stimulus and expectations of more to come, with energy tagging along to some extent (+0.7%).

The banks were a primary driver (+0.9%) on lower US inflation, which implies the Fed might be done, although last night killed that notion.

Aussie bond yields increased by 4 points in the tens and 7 points in the twos, impacting real estate, utilities and discretionary, all down -0.4%, although in the latter case weekly consumer confidence data showing sentiment at its lowest level in three years didn’t help.

Technology was the laggard (-1.4%), having shot up on Tuesday.

On an index winners & losers basis, it was all about resource stocks on the upside and, CSL, aside, a lot to do with weakness in gold miners on the downside.

Despite Wall Street closing flat, our futures are up 21 points this morning, with nothing major to report in commodity price movements overnight.

What we will see today is Chinese data for May which, if they come in weak again as is highly likely, may well be what Beijing has been waiting for ahead of unleashing some fiscal stimulus.

Believe it or Not

Ahead of last night’s Fed decision, the US producer price index showed a -0.3% fall in May to an annual rate of 1.1%, down from 2.3% in April, to the lowest reading since December 2020. The core PPI was flat, with the annual rate falling to 2.8% from 3.3%.

Clearly inflation is heading in the right direction, providing justification for the Fed to leave its funds rate at 5.00-5.25% and so providing the pause that was more than 90% predicted by the market. On that basis, and the rally on Wall Street to this point, a pause was never going to be a market-mover.

What was a market-mover were the FOMC’s quarterly “dot plots”, which suggested the majority of members expect two more rate hikes from here. Wall Street plunged on the statement release.

We do recall however that Fedspeak leading up to the decision was dominated by the word “skip”, not “pause”.

Given the market had begun to price in the chance of another pause in July, and contemplated the possibility of the Fed being done, even if it wasn’t going to cut anytime soon, the two more hike forecast was a bit of a shock. But by the end of Jay Powell’s press conference, Wall Street had recovered.

The Dow looks out of place, but that was due to an unrelated -6.4% fall for United Health, which is the highest priced stock in the average by a margin.

The obvious question is: if you think you’ll need two more rate hikes, why pause? The answer is the Fed is looking to slow the pace of hikes but not change the level of where the peak rate will be. This allows for more data to flow in, and is not unprecedented in past Fed hiking cycles.

Powell tempered Wall Street by noting that the Fed had not yet made any decision on July, meaning the decision then is “live”, and could yet be another pause.

Powell also reiterated that the Fed would rather push rates too far and then need to cut rather than claim victory over inflation now – which it sees as still too high – and risk inflation turning upward again. This is exactly how Philip Lowe explained away the past two RBA hikes.

Powell also admitted the Fed had got its inflation forecasts wrong, which implies it could still be wrong, but did not shock Wall Street given most everyone else has been wrong too. Within its quarterly forecasts, the Fed raised its year-end core expectation to 3.9% from 3.6%, but also raised its 2023 GDP forecast to 1.0% growth from 0.4%.

A soft landing, perhaps.

We’ll have to wait till tonight’s session to see what Wall Street really thinks, after time to absorb the details. But for now, a flat S&P suggests the market does not necessarily believe there will be a need for two more rate hikes.

Wall Street has fought the Fed all year, and continues to do so.

Commodities

The LME is closing just as the Fed statement is released.

Zinc rallied after Swedish miner Boliden said it will suspend production at Europe’s largest zinc mine in Ireland within the next month because of “unsustainable financial losses”.

Otherwise, small moves. Gold held up on mixed moves in US bond yields post Fed.

The US dollar fell -0.3% so the Aussie is up 0.4% at US$0.6795.

Today

The SPI Overnight closed up 21 points or 0.3%.

We’ll see May jobs numbers today.

New Zealand reports its March quarter GDP.

China will release May industrial production, retail sales and fixed asset investment data.

The ECB meets tonight.

The US will see may industrial production and retail sales numbers.

Incitec Pivot ((IPL)) goes ex.

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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