The Overnight Report: Sufficiently Benign

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World Overnight
SPI Overnight	7247.00	– 1.00	– 0.01%
S&P ASX 200	7235.30	+ 36.30	0.50%
S&P500	4643.70	+ 21.26	0.46%
Nasdaq Comp	14533.40	+ 100.91	0.70%
DJIA	36577.94	+ 173.01	0.48%
S&P500 VIX	12.07	– 0.56	– 4.43%
US 10-year yield	4.21	– 0.03	– 0.78%
USD Index	103.81	– 0.28	– 0.27%
FTSE100	7542.77	– 2.12	– 0.03%
DAX30	16791.74	– 2.69	– 0.02%

By Greg Peel

Bad News Good?

One would be forgiven for assuming there was a decent fall in Aussie bond yields yesterday, given rate-sensitive sectors in the ASX200 largely led the 0.5% gain for the index. But there wasn’t – yields fell all of one point.

And noting that on Monday the index failed to gain any traction, fading to close, which implied perhaps caution ahead of the US CPI and Fed meeting, it looks like a large buy order hit the market in the morning.

Either that, or traders were very pleased with the very weak confidence surveys.

The futures said up 13 points, but the index just went straight up 42 points from the open to midday then stopped, giving back a little in the afternoon.

Technology stood out with a 2.1% gain, followed by staples (+1.4%) and real estate (+1.1%). Comm services posted 0.8%, industrials 0.7% and utilities 0.6%.

Only discretionary lagged with 0.3%, while it was a good session for the banks (+0.5%) and healthcare (0.9%).

If there was a big buy order, the instruction must have been No Resources. Materials closed flat and energy gained only 0.2%.

In materials, it was another bad day for lithium miners, as the lithium carbonate price again tanked in China. The gold price was down again, so it was left to steady iron ore prices to balance out the sector.

As for energy, oil prices have had another leg down overnight.

If sentiment appeared positive, it was not with any help from yesterday’s data.

In responding to the NAB business confidence survey for November, the Westpac economists’ take was “business confidence crumbles, economy buckles”. Confidence fell -6 points to -9. Conditions fell -4 points to +9. Westpac is pointing to a looming business investment downturn.

Westpac’s own consumer confidence survey for December looked a little better, rising 2.7% to 82.1, but sentiment remains around the lowest level since before the pandemic. With the strain hitting household budgets, consumers fear yet another RBA rate hike.

But…if business investment tanks, that will help ease inflation. If consumers refuse to pay up for certain goods/services as prices rise, that will ease inflation. There may be no need for another rate hike, and the decision will not be made until February.

But it might also be the case that the RBA has to start cutting if it has forced the economy into recession.

Not too Hot

The US headline CPI was expected to remain flat again in November, as it had in October, but instead rose 0.1%. The core rate was expected to rise 0.3%, up from 0.2% in October, and that proved to be the case.

The good news is the annual headline rate ticked down to 3.1% from 3.2%. The core rate remained unchanged at 4.0%, but at least it didn’t go up.

It has long been assumed the “last mile” of bringing down inflation would take a lot longer than the rapid drop seen this year from high single-digits to low. This is what the Fed (and RBA) has been concerned about. But Wall Street saw nothing in the CPI numbers to change the view that the Fed will not hike tonight, and the next move will be cuts next year.

So it was back on to the sleigh. The stock indices tracked higher all session to close on their highs. Buying was uniform, with the Russell small cap again joining in.

The US ten-year yield fell -3 points to 4.21%.

What has changed is the expectation of when the first Fed rate cut will come. For some time the market had priced in a near 50/50 chance of the first cut as early as March. But that was more a reflection of recession expectations than it was of easing inflation.

Recession expectations have since eased, and a soft landing is now the consensus forecast. Inflation may come down slowly from here but it will come down. The market has now pushed the first rate cut further out to May or June. It will come not because the Fed needs to save the economy, but because the Fed can afford to ease off the pressure.

What will be interesting in tonight’s press conference post-statement is the fact Powell suggested at the November meeting financial conditions were already tight enough (ten-year yield at 5%). That yield is now -75 points lower. Will he thus say conditions need to be tightened further (rate hike) or will he say “there you are – you’ve already got your cuts. No need for us to do anything yet”.

The FOMC members’ dot plots will tell a fascinating tale.

In the meantime, Wall Street remains happy to ride the seasonal theme.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1979.90	– 0.60	– 0.03%
Silver (oz)	22.78	– 0.04	– 0.18%
Copper (lb)	3.73	– 0.02	– 0.60%
Aluminium (lb)	0.95	+ 0.00	0.46%
Nickel (lb)	7.35	+ 0.02	0.26%
Zinc (lb)	1.10	+ 0.02	1.89%
West Texas Crude	68.75	– 2.62	– 3.67%
Brent Crude	73.40	– 2.66	– 3.50%
Iron Ore (t)	135.66	+ 0.50	0.37%

Unlike equity traders, oil traders are concerned stubborn inflation will continue to erode demand. Together with the assumption OPEC’s voluntary production cuts are a joke, oil prices took another leg down last night.

Which of course eases headline inflation.

The Aussie is steady at US$0.6563.

Today

Futures traders seem happy to book yesterday’s gains. Ahead of the Fed, the SPI Overnight closed up 2 points.

Before the Fed wraps up its meeting tonight, the US November PPI will be released.

Orica ((ORI)) holds its AGM today, while Goodman Group ((GMG)) holds an investor forum.

The Australian share market over the past thirty days…

Index	12 Dec 2023	Week To Date	Month To Date (Dec)	Quarter To Date (Oct-Dec)	Year To Date (2023)
S&P ASX 200 (ex-div)	7235.30	0.56%	2.09%	2.65%	2.79%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AWC	Alumina Ltd	Upgrade to Neutral from Underperform	Macquarie
CGC	Costa Group	Downgrade to Neutral from Outperform	Macquarie
ERD	Eroad	Downgrade to Hold from Buy	Bell Potter
GMD	Genesis Minerals	Downgrade to Neutral from Outperform	Macquarie
GOR	Gold Road Resources	Downgrade to Neutral from Outperform	Macquarie
PLS	Pilbara Minerals	Downgrade to Neutral from Buy	Citi
REG	Regis Healthcare	Upgrade to Buy from Accumulate	Ord Minnett
SIQ	Smartgroup Corp	Downgrade to Hold from Add	Morgans
VUK	Virgin Money UK	Upgrade to Outperform from Neutral	Macquarie

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

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