The Overnight Report: Not Restrictive Enough

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World Overnight
SPI Overnight	7148.00	– 5.00	– 0.07%
S&P ASX 200	7196.50	+ 78.30	1.10%
S&P500	4376.86	– 1.55	– 0.04%
Nasdaq Comp	13591.75	+ 36.08	0.27%
DJIA	33852.66	– 74.08	– 0.22%
S&P500 VIX	13.43	– 0.31	– 2.26%
US 10-year yield	3.71	– 0.06	– 1.54%
USD Index	102.97	+ 0.46	0.45%
FTSE100	7500.49	+ 39.03	0.52%
DAX30	15949.00	+ 102.14	0.64%

By Greg Peel

Inflated Hopes?

The ASX200 opened firmly to the upside yesterday but at 11.30am, shot straight up through 7200, before flattening out in the afternoon and closing slightly below that mark.

At 11.30am the ABS released its May CPI data. The excitement was centred on a fall in annual headline inflation to 5.6% from 6.8% in April. The trimmed mean, or core rate, fell to 6.1% from 6.7%.

Happy days. The market has clearly decided that given last month’s RBA decision to hike again was “finely balanced”, these numbers provide a strong argument for a pause next week.

But hang on. The ABS also printed another measure, which excludes fuel and food costs (as does the core) and also holiday travel, which is also considered a volatile item. That measure, which happened to be highlighted in the minutes of the June RBA meeting, fell only to 6.4% from 6.5%.

Fuel and food costs have clearly come down. Holiday travel, including accommodation costs, fell -11.3% in May. Rising in May were rents, restaurant/takeaway prices and a range of services. Services are the sticking point, as oft noted by the RBA.

So, will we get a pause next week? It’s possible, but ANZ Bank economists, for one, are still assuming hikes in July and August, and either way, even if there is a pause, another two hikes to 4.60%.

As far as yesterday was concerned, the inflation print was great news for your average wallet, and thus worth a 2.2% jump for consumer discretionary. That gain was nevertheless exacerbated by a positive “profit warning” from Harvey Norman ((HVN)), which rose 4.9%.

The bond market was more indicative of a pause, with the twos falling -7 points and the tens -5 points, which was good news for real estate (+2.1%).

The banks provided the grunt (+1.4%).

Defensives underperformed. Utilities closed flat and staples and healthcare rose only 0.5% when all about were posting 1%-plus gains. Except for materials, which traded off higher metals and iron ore prices against weakness in gold (+0.6%).

The Aussie dollar has been slapped, twice, once from the CPI and again on a 0.5% gain in the US dollar, and it's down -1.3%.

So, 7200 appears to be back in play again. Wall Street was largely flat last night and our futures are down -5 this morning.

Today we’ll see numbers for May retail sales, which could let some of the air out.

In other news, Chinese industrial profits fell -18.8% year to date in May, having fallen -20.6% to April.

Play it again Sam

At the ECB’s central bankers gathering in Portugal last night, Fed chair Jerome Powell noted in a panel discussion a “strong majority” of Fed policy makers were looking for two more 25 point interest-rate increases this year, potentially from the next policy meeting on July 26. The following meeting is on September 20, with Jackson Hole in the middle.

“Although policy is restrictive,” said Powell, “it may not be restrictive enough and it has not been restrictive for long enough”.

Meanwhile, the heads of the ECB and Bank of England both suggested rates have not yet peaked, and cuts are not on the cards for some time.

Wall Street initially fell on Powell’s comments until someone pointed out they were no different from anything he has said recently.

For those expecting a pause in July, and maybe only one more hike, the futures are now pricing in an 82% chance of a July hike.

The Nasdaq again led last last night, despite falls for chipmakers such as Nvidia and AMD. Last year the Biden administration banned the sale of AI chips to China, threatening US$400m in Nvidia sales, but the company found a workaround in supplying lower-end versions of products that skirted the ban.

Now Biden wants to ban those too.

Bank stocks were mostly lower last night, ahead of the release of annual Fed stress tests, which came out after the bell. The tests have taken on a lot more relevance since the collapse of SVB and other regionals.

The problem is the small banks are only tested every other year, and not this one. There is new regulation being considered in light of SVB. Otherwise, all 23 banks required to take the Fed’s exam fared better this year compared to last year, despite being subjected to a worst-case scenario that was even more painful than last year’s.

There are also new international (Basel) regulations due soon. The S&P500 banking sector is down -4.2% year to date and as is often pointed out, you can’t have a bull market unless the banks are involved.

That was before AI.

Commodities

Any joy from the Chinese premier’s comments on Tuesday has been short-lived, although iron ore remains supported.

Oil prices rose on lower than expected weekly US crude inventories.

The Aussie is down -1.3% at US$0.6602.

Today

The SPI Overnight closed down -5 points.

As noted, we’ll see May retail sales today.

Yesterday I jumped the gun. The big round of quarterly ex-divs for REITs et al is today.

Spot Metals,Minerals & Energy Futures
Gold (oz)	1907.40	– 6.30	– 0.33%
Silver (oz)	22.68	– 0.16	– 0.70%
Copper (lb)	3.77	– 0.04	– 1.17%
Aluminium (lb)	0.97	– 0.01	– 0.72%
Nickel (lb)	9.00	– 0.27	– 2.95%
Zinc (lb)	1.06	– 0.02	– 1.70%
West Texas Crude	69.56	+ 1.86	2.75%
Brent Crude	73.57	+ 1.07	1.48%
Iron Ore (t)	114.21	+ 1.59	1.41%

The Australian share market over the past thirty days…

Index	28 Jun 2023	Week To Date	Month To Date (Jun)	Quarter To Date (Apr-Jun)	Year To Date (2023)
S&P ASX 200 (ex-div)	7196.50	1.37%	1.48%	0.26%	2.24%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALQ	ALS Ltd	Upgrade to Lighten from Sell	Ord Minnett
BGA	Bega Cheese	Downgrade to Hold from Buy	Bell Potter
BMN	Bannerman Energy	Upgrade to Buy from Hold	Shaw and Partners
BOE	Boss Energy	Downgrade to Hold from Buy	Shaw and Partners
BSL	BlueScope Steel	Downgrade to Neutral from Buy	UBS
CMM	Capricorn Metals	Upgrade to Outperform from Neutral	Macquarie
CMW	Cromwell Property	Upgrade to Buy from Accumulate	Ord Minnett
DDH	DDH1	Downgrade to Hold from Buy	Bell Potter
		Downgrade to Neutral from Outperform	Macquarie
ELD	Elders	Upgrade to Buy from Hold	Bell Potter
HLO	Helloworld Travel	Upgrade to Accumulate from Lighten	Ord Minnett
LOV	Lovisa Holdings	Upgrade to Accumulate from Hold	Ord Minnett
MIN	Mineral Resources	Downgrade to Sell from Neutral	UBS
MND	Monadelphous Group	Upgrade to Accumulate from Hold	Ord Minnett
NHC	New Hope	Downgrade to Underperform from Neutral	Macquarie
PLS	Pilbara Minerals	Downgrade to Neutral from Buy	UBS
SHL	Sonic Healthcare	Upgrade to Hold from Lighten	Ord Minnett
TPG	TPG Telecom	Upgrade to Buy from Accumulate	Ord Minnett

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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