The Overnight Report: Bonds The Place To Be

Array
(
    [0] => Array
        (
            [0] => ((HVN))
            [1] => ((TPW))
            [2] => ((LNK))
            [3] => ((FPH))
            [4] => ((IRE))
            [5] => ((ALL))
            [6] => ((TNE))
        )

    [1] => Array
        (
            [0] => HVN
            [1] => TPW
            [2] => LNK
            [3] => FPH
            [4] => IRE
            [5] => ALL
            [6] => TNE
        )

)

This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

Afternoon Snooze

The trend all week has been one of Wall Street going nowhere every day while the ASX200 has opened with a level of enthusiasm only to fade away from morning gains to losses through the afternoon. Is everyone going to Christmas lunches? Every day?

The index opened up 28 points in the first half hour yesterday but pulled back again ahead of the 11am CPI release. It then shot up to a 40 point gain, but disinterest set in once more and the index gave back half through the afternoon.

One might have expected a bit more excitement over a -14 point fall in the Aussie ten-year yield post-CPI and a -13 point fall in the twos to 4.09%. The twos had moved up to over 4.30% ahead of the November RBA meeting and correctly predicted a rate hike to 4.35%.

Now they are screaming no rate hike in December, and then the next meeting is not until February.

The October annual headline CPI came in at 4.9%, down from 5.6% in September and below 5.2% forecasts. Month on month it fell -0.3%. Lower fuel costs contributed thus there was only a slight fall in the core rate to 5.2% from 5.3%.

One notable fall in the headline basket was that of holiday prices, falling a full -7.0% month on month. It appears the post-covid “get me out of the house” boom has now run its course. Another noteworthy move was in rents, down -0.4%, which seems contrary to anecdotal evidence.

As heartening as the numbers were, economists take issue in the series, noting the monthly CPI indicator does not accurately reflect domestically-driven and services inflation, which RBA Governor Michele Bullock said in a recent speech are driving inflation. Price changes were only measured for around 46% of services and 56% of non-tradables by weight in the CPI basket in October.

The true CPI result comes quarterly, and the next one’s in January.

The numbers, and the subsequent fall in yields, did manage to fire up discretionary (+1.6%) and real estate (+1.0%) and yields drove a 2.1% gain for technology.

In the former case, Harvey Norman ((HVN)) rose 4.2% on its AGM and Temple & Webster ((TPW)) 14.4% on its AGM although that stock is not in the index.

In the latter case, Link Administration ((LNK)) topped the boards with an 8.5% gain as it kicked on post a positive AGM update on Tuesday.

Yet the banks fell -0.4% and staples -0.2%. Oil prices were stronger overnight yet energy posted the biggest loss (-0.8%) followed by utilities (-0.6%).

Healthcare jumped 1.8% with a bit of help from Fisher & Paykel Healthcare ((FPH)), which gained 7.8% on its earnings result.

Lower iron ore prices held back materials (+0.3%) despite a big jump in price driving gold miner gains.

Wall Street has not closed flat overnight but rather eased a little, and our futures are up 5 points this morning.

Momentum Trade

It’s as if investors have abandoned the stock market and moved into bonds instead. Last night the US tens fell another -8 points and the twos -10 points.

The further falls were attributed to the Fed Beige Book showing mostly weaker economic activity and easing demand for labour, and the Atlanta Fed president saying he is more confident in his forecast of a soft landing for the economy and inflation to keep falling to 2%.

The odds of a Fed rate cut in March have risen to 46% and a cut by May to 76%.

But bond yields have been falling steadily most ever day since the ten-year yield peaked above 5%. Last night they were at 4.26%. The market is piling in to what has clearly become a momentum trade.

The problem is, a lot of Chair Powell’s shift to slight dovishness perceived at the November press conference centred around him implying higher yields have done a lot of the Fed’s work for it in tightening financial conditions. At the prior meeting the tens were around 4.5%, and at the November meeting around 5%, which equates to two rate hikes.

But what now? The tens are the equivalent of three rate cuts lower.

Lower inflation will need to back up the market’s pricing and tonight’s October PCE numbers will be critical. Otherwise, the Fed has left the door open to hike again.

It’s difficult to know where Wall Street stands on the good news/bad news theme at present. Wall Street on the one hand was pleased with a revision of the US September quarter GDP result up to 5.2% from a prior 4.9% last night, but also cheered the dour Beige Book.

Stock indices were stronger earlier in the session, only close flat to slightly weaker.

The Dow closed flat as a tack. After the bell last night, component Salesforce reported earnings and is currently up 7% in the aftermarket.

Commodities

Iron ore has stabilised following falls on Beijing interference.

The oils are again higher ahead of tonight’s OPEC-Plus meeting.

The CPI numbers and bond yield falls have the Aussie down -0.5% to US$0.6613 with no movement in the US dollar.

Today

The SPI Overnight closed up 5 points.

Yesterday’s September quarter construction work done numbers were better than expected and today we’ll see private sector capex.

We’ll also see October private sector credit and building approvals.

China reports November PMIs.

PCE inflation in the US.

There’s a handful of AGMs today for smaller companies.

Iress ((IRE)) hosts an investor day.

Aristocrat Leisure ((ALL)) and TechnologyOne ((TNE)) go 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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms