The Overnight Report: Release The Doves

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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

It’s Academic

In another show of a confident market this week, taking the risk on US inflation data and last night’s Fed statement, the ASX200 made a stumbling start yesterday but by lunchtime was up 32 points before fading into the afternoon.

It has been a safe call, as US inflation data has behaved and Wall Street took off last night on the Fed statement and press conference. Out futures are up 79 this morning.

Healthcare was the most sought after sector yesterday (+1.1%) largely thanks to CSL ((CSL)) and ResMed ((RMD)). Recent data show the weight goes right back on as soon as you stop taking the new weight-loss drugs, which are far from cheap.

Sigma Healthcare ((SIG)) came back on the boards yesterday after its capital raise for a reverse-takeover of Chemist Warehouse, and jumped 36%, but is not in the index.

The banks were the primary driver (+0.6%), with the Aussie ten-year yield down another -4 points, although this did little to help the consumer sectors. A lack of any further cozzie livs relief in the government’s MYEFO released yesterday may have been the cause of staples falling -0.6% and discretionary -0.1%.

Comm services and utilities were also lower while energy was down (-0.8%) on falling oil prices.

Materials (+0.3%) balanced out strength in iron ore with weakness in gold and a flat day, for once, for lithium. Gold jumped up US$40/oz last night.

No point in digging further. The break of the technically important 7200 level for the ASX200 has likely provided a base for this week’s cautious rallies, and today we should see 7300 passed by as well.

Where’s the “any” key?

The US headline PPI saw no growth in November when 0.1% was forecast, taking the annual rate down to 0.9% from 1.2% in October. The core rate rose 0.1%, taking the annual rate down to 2.5% from 2.8%.

In his press conference Q&A last night, Jerome Powell confirmed that FOMC members could still take the morning’s PPI data, and Tuesday’s CPI data, into account when deciding their “dot plot” forecasts, despite the late hour.

The consensus of those forecasts is now for three Fed rate cuts next year.

Powell said he believes the central bank’s policy rate now is “at or near a peak”. He also said inflation data will be closely watched, and that the Fed is focused on not keeping rates too high for too long.

The word in the statement that raised the most eyebrows was “any”. Before last night, the Fed has always said, in its prior hawkish tone, that officials will consider the extent of additional policy firming that’s needed. Last night the statement said officials will consider the extent of any additional policy firming that’s needed.

Subtle, yes. But central bank rhetoric and messaging is all about subtlety.

Suffice to say, having backed out first rate cut expectations to June in the past week, the market now has March back with a 57% chance.

The US ten-year yield fell -17 points to 4.03% — down -100 basis points from its October peak. The two-year fell a full -30 points to 4.45%.

If we take the two-year as the cash rate proxy, the bond market is pricing in four rate cuts.

Little surprise stocks took off. The Russell small cap, which is heavy with rate-sensitive stocks, jumped 3%.

Interestingly, not all the Mega Caps participated. Microsoft, for example, fell -0.5%, no doubt providing funding for expanding a portfolio into a wider range of stocks.

It looks like being a Merry Christmas, and Santa just got new turbocharger.

Wall Street will now be very much focus on next year’s first rate cut. But be careful what you wish for, as history suggests the first cut counter-intuitively brings about selling.

But…that depends on why the Fed is cutting. Powell did acknowledge the capacity for the Fed to cut to “normalise” policy, rather than cutting to save a weakening economy.

Commodities

The LME was closed before being able to respond to the Fed. That will come tonight.

Aside from the demand benefit of lower rates, the US dollar is down -0.8%.

Gold has been given a new lease of life.

The oils likely reflect the dollar.

A bit of a downer for our exporters – the Aussie is up 1.6% at US$0.6666.

Today

The SPI Overnight closed up 79 points or 1.1%.

We’ll see November jobs numbers today.

New Zealand reports September quarter GDP.

Both the Bank of England and ECB hold policy meetings tonight.

Westpac ((WBC)) and Elders ((ELD)) hold AGMs today.

Metcash ((MTS)) 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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