The Overnight Report: Yields Back Up

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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

Unhealthy

Apologies for jumping the gun on the local jobs report yesterday. It’s actually due next week, which is quite late in the month compared to what we’re used to. The date of the report was not my guess.

To yesterday’s market, I suggested investors might be cautious ahead of last night’s US CPI release and a flat close implies this was the case, but it wasn’t. Rallies for most sectors, and particularly the banks (+0.8%) and materials (+0.7%), provided the offset to a -4.5% crash for the healthcare sector.

This echoed a similar sector move on Wall Street on Wednesday night after Novo Nordisk ended its trial of Ozempic for kidney disease a year early due to its success. Ozempic has sent shockwaves through the US healthcare sector and our biggest companies derive the bulk of their earnings therein.

Ozempic is a treatment for type-2 diabetes specifically but also an anti-obesity drug. Its success challenges CSL’s ((CSL)) Vifor and that stock was down -6.3%. Obesity is a common cause of sleep apnoea so ResMed ((RMD)) fell -5.3% and Fisher & Paykel Healthcare ((FPH)) -4.4%.

The three were split atop the index losers’ board only by Tabcorp Holdings ((TAH)), which issued a profit warning and fell -5.3%.

Other sectors (including the banks) were again bolstered by falling bond yields, with the Aussie ten-year down -6 points. But that will reverse today in synch with US yields.

Real estate (+0.9%) and technology (+0.6%) enjoyed the lower yields and net of Tabcorp, discretionary managed to hang on for a flat close.

Not so staples (-0.2%) and industrials (-0.1%). Energy was the worst performer after healthcare in falling -0.6% on lower oil prices.

The healthcare situation remains uncertain. The Ozempic story already had ResMed tumbling in early August but analysts were quick to jump in and defend the stock, suggesting fear was overblown and pointing out details such as side-effects from the drug and the fact weight goes right back on as soon as you stop taking it.

And it’s expensive.

Expect a lot of questions to be directed toward presenters at CSL's upcoming Capital Markets day on Monday.

Otherwise, it was not the US CPI but a weak auction of US 30-year bonds last night that sent Wall Street back into selling mode, after yields jumped once again.

Our futures are down -58 points this morning.

Absent Buyers

The US CPI for September did indeed come in “hot”, but not dramatically so.

The headline rate rose 0.4% when when 0.3% was forecast, down from August’s 0.6% on rising energy prices. The annual rate remained unchanged at 3.7%, but economists had forecast 3.6%.

The core rate rose 0.3% as expected. The annual core fell to 4.1% from 4.3%.

With oil prices having come off their peak, the sticking point remains “shelter”, or specifically rent. Rent makes up a large proportion of the CPI basket and commentators argue that it is backward-looking and thus misleading. More recent industry data shows rents heading lower.

Wall Street did fall from the open on the release but recovered to lunchtime. The Nasdaq did not fall at all due to a muted response in bond yields but that all changed at 1pm, when the US Treasury held an auction of 30-year bonds that drew few buyers.

The US ten-year yield subsequently jumped 12 points to 4.71% and the two-year rose back over 5%. Having spent the week enjoying yield relief, the stock market headed south.

In terms of Fed policy, the assumption remains there is no need to hike again given the net move up in yields since the last meeting. The CPI was not hot enough to shift the balance.

The futures did increase the chance of a December hike to 31% from 26%, but November’s chance remains at only 12%.

The weak auction also highlights the issue of too much supply and not enough demand driving yields higher, rather than simply a stronger than expected economy. On November 1 the US Treasury will inform of how much more it must borrow, which is the same day as the Fed meeting.

With the CPI out of the way, attention now turns to earnings season which kicks off tonight.

In other news, negotiations between the UAW and Ford have reached a stand-off, and last night 8700 workers walked off the job at a Ford truck-making factory in Kentucky – the company’s largest and most profitable factory, representing close to 20% of Ford’s earnings.

Las Vegas casinos are in last-minute talks with workers in order to avoid a threatened strike.

Commodities

Nothing to write home about.

The currency’s looking rather ill again. The jump in US yields has the US dollar up 0.8% and the Aussie down a full cent, or -1.6%, at US$0.6314.

Today

The SPI Overnight closed down -58 points or -0.8%.

China will report its September inflation numbers today and trade data.

Aside from Big Bank earnings, the US will see consumer sentiment.

Harvey Norman ((HVN)) goes ex-div.

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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