The Overnight Report: Disinflation

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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

Comeback Trail

The ASX200 opened up 50 points yesterday after Wall Street had put on 0.7% overnight but momentum waned as the session progressed, likely due to caution ahead of last night’s US CPI print which was absent on Wall Street.

Seems the Yanks have a bit more guts, as inflation came in lower than expected and Wall Street added another 0.7% last night, while our futures are up 0.9% this morning on a game of catch-up. While Wall Street is again looking to new highs, for us it’s a long way back.

We can thank a sluggish Chinese economy and lack of any significant stimulus to date.

Resources led the charge yesterday with materials up 1.0%, and energy up 2.0% on higher oil prices as Russia and the Saudis press for lower production. Oil prices were up again last night, and the gold price shot up as well, suggesting more of the same today.

Were the US CPI not looming there may have been more excitement over a subtle dovish twist in Philip Lowe’s tale yesterday. The RBA governor said he has "a completely open mind" to further [policy] changes and "it is possible that some further tightening will be required".

The word “possible” is the twist. This did not appear in the July policy statement.

Aussie bond yields fell -5 points.

And across The Dutch, the RBNZ kept its cash rate on hold after 13 consecutive hikes. Lamb roasts all round last night.

The banks were at least positive (+0.2%) as were the consumer sectors, while real estate stood still. US bond yields fell sharply last night so watch this space.

Healthcare remains the laggard (-0.6%), and likely a funding source for resource sector buying yesterday, as perhaps was technology (-0.5%), even as Megaport ((MP1)) added another 5.5% to again top the index.

Utilities also closed in the red (-0.1%).

In an indication analysts are right to be cautious about discretionary retailers, KMD Brands ((KMD)) fell -9.8% yesterday after acknowledging a slow start to winter sales. Winter itself has not been slow this year, so weak demand for Kathmandu clothing can only be put down to household budget tightening.

The “cool” US CPI result has spurred hopes for a similar outcome locally, which will drive improved sentiment today.

Long Road

The US headline CPI rose 0.2% in June when 0.3% was forecast, taking the annual rate all the way down to 3.0% from 4.0% in May, to mark the lowest level since March 2021.

The core CPI also rose 0.2% — the smallest gain in almost two years – when 0.3% was forecast. But once more the annual rate showed only a marginal decrease, to 5.0% from 5.3%.

Wall Street liked it, and continued on its merry way, while the US ten-year yield fell -12 points and the two-year -16 points while the US dollar was thumped down -1.7%, which is largely unheard of.

The fall in the core rate to 5.0% is at least significant in the fact the top end of the Fed fund rate is 5.25%, suggesting, if this is the measure one wants to use, policy is now restrictive. At the headline, interest rates are “positive real” (nominal minus inflation).

But progress is slow. And getting even the headline down towards 2% will still be tough, noting oil prices have rallied strongly in July to date. As for the core, these incremental monthly falls suggest 2% is still a long way off, underscoring the Fed’s “stronger for longer” mantra.

Does the Fed still need to keep hiking? Wall Street continues to expect another 25 points this month, but given the following meeting is not until September, the question of a further hike is now less certain. The futures are now pricing in less than 20% chance of a September hike.

The Fed Beige Book was also released last night, showing five of of the twelve Fed districts are reporting slight or modest growth, five noted flat activity and two reported slight or modest declines.

An economy that’s slowing, but not showing clear recessionary signs as yet.

Tonight we’ll see the US PPI for June, and then on Friday night, JPMorgan, Citigroup and Wells Fargo kick off the June quarter earnings season.

In an aside for Australian investors, Domino’s Pizza US last night broke with its policy and announced it is teaming up with Uber Eats to boost its delivery capacity, which till now has been kept in-house. Beginning in the US, the new deal will be rolled out across the globe.

Our Domino’s Pizza Enterprises ((DMP)) is its own master so it remains to be seen what transpires here, but Domino’s US jumped 11% on the news.

Commodities

A US dollar fall of that magnitude would have been expected to do more for metals prices, but only the precious variety saw the benefits.

As did the oils.

The Aussie is up 1.5% at U$$0.6792.

Today

The SPI Overnight closed up 62 points or 0.9%.

China will report June trade data today.

US PPI tonight.

Netwealth Group ((NWL)) provides a quarterly update.

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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