The Overnight Report: Damn The Torpedos

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            [2] => AGL
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This story features CSL LIMITED, and other companies.
For more info SHARE ANALYSIS: CSL
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Two-Hike Contagion

On Wednesday night the Fed indicated it expected two more rate hikes before a peak and yesterday local economists were rushing to cement the same expectation here – hikes in July and August to take the cash rate to 4.60% — following the day’s shock jobs report.

There were -4000 jobs lost in April, seemingly indicating, finally, that the burden of higher rates to date was starting to take its toll on the economy. But in May, 75,900 jobs were added – 61,700 full-time – to take the unemployment rate down from 3.7% to 3.6%, or 3.55% to be precise.

The report stopped the ASX200 dead in its tracks, given the rate hike implications, which at 11am was up 36 points lead by miners and the banks. By midday the index was back to square. Yet the buyers quickly returned to post a modest gain, with the index plateauing all afternoon.

Why the sudden surge in jobs, against all expectation? The ABS noted “A greater share of women in Australia are employed than ever before, with their employment to population ratio and participation rate both at record highs in May.”

One presumes there’s a least some element of having to pay the mortgage in that trend.

The banks did ultimately post a solid 0.8% gain, given the implications of less mortgage stress amidst low unemployment. Materials fell back to be up only 0.3%.

The big drag again was healthcare, down another -2.0%, as investors continued to unload CSL ((CSL)) following Wednesday’s profit warning (-2.7%).

The Aussie ten-year yield rose 3 points to hit 4.00% and the two-year rose 9 points to 4.17%, which makes it difficult to understand why real estate was up 0.7%. Low unemployment implies a stronger consumer – good for retail REITs – but consumer discretionary was largely flat on the day.

Energy was flat and utilities fell -0.6%, although oil prices were up strongly last night. Industrials were positive (+0.7%) and technology rose 1.0%, as is its wont.

The index top five winners & losers lists feature resources stocks on both sides, but standing out was a table-topping 4.6% gain for Insurance Australia Group ((IAG)), after investors took on board positive broker assessments following IAG’s investor day on Wednesday.

In other news, Chinese industrial production rose 3.5% year on year in May, down from 5.6% in April. Retail sales rose 12.7%, down from 18.4%. Fixed asset investment rose 4.0% year to date, down from 4.7%. All results missed forecasts.

Bring on the stimulus.

Last night investors on Wall Street decided to ignore the Fed and race onward to a new 52-week high for the S&P500.

Our futures are up 29 points this morning.

Ignoring the Fed

The ECB hiked by 25 points last night and suggested it was in “no mood” to pause at this stage, given inflation is still too high.

On Wednesday night the Fed paused but the “dot plots” suggested two more hikes ahead (on an average of member predictions), albeit more widely paced form here rather than in the next two meetings.

Wall Street does not assign too much credence to the dot plots, as they are more “guess” than prediction. Go back to before the Fed started hiking last year and the dot plots were indicating that by now the funds rate would be 0.75%.

There is an increasingly loud chorus of commentators believing the Fed is now done, and the peak is in. Among economists, the average forecast is for just the one more hike, maybe in September (there is no August meeting).

There are also those who suggest that after a swift run to 5.00-5.25% for the funds rate, another 25 is really not going to make much difference.

And so last night, Wall Street surged ahead. The S&P hit a new 52-week high. Apple shares hit a new all-time high (intraday).

There was positive economic news last night – US retail sales rose 0.3% in May when a -0.2% fall was forecast. April’s 0.4% gain had also beaten expectations. Despite the headwinds, but amidst low unemployment, the US consumer remains resilient.

But in looking for reasons to support this recent rally, a more interesting data point was that for the first time since 2019, US money market funds saw outflows last week. No prizes for guessing where that cash is now flowing. Having broken up through 4200, the S&P500 swung to technically positive, and continued to be more technically positive with the “end of the bull market”, up 20% from the low.

Wall Street is being driven by momentum, by FOMO, and by fund managers who have been overweight cash and underweight equities given their recession assumptions, who are now worrying just how poorly their portfolios will have performed when they report June quarter returns.

Adding to faith in the rally, beyond the technical, is increasing breadth. All three major indices rose by the same percentage last night, and in the S&P, gains were very uniform across every sector. No sector saw a loss.

This implies there is no rotation out of overvalued Mega Tech, as one might have thought, but that the rest of the market now catching up.

How long can it last? Let’s just say the bears are beginning to ask the same question.

Commodities

While China’s May data were weak, digging down among the details revealed China’s oil refinery throughput rose 15.4% year on year in May, hitting its second highest total on record. Add in better than expected US retail sales and oil prices jumped once more.

The oils have been rather volatile of late, but really haven’t gone anywhere much.

Commodity prices were also supported last night by the US dollar being slammed -0.8%. US bond yields also fell. Two more rate hikes? Pull the the one.

Gold subsequently saw some buying, and the Aussie shot up 1.3% to US$0.6884.

Today

The SPI Overnight closed up 29 points or 0.4%.

The Bank of Japan meets today.

The eurozone will see May CPI numbers.

The US will see a consumer sentiment survey.

AGL Energy ((AGL)) hosts an investor day.

The Australian share market over the past thirty days…

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