The Overnight Report: Disappointment

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This story features BHP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: BHP
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck

Greg Peel will return later this month.

Now THAT was not supposed to happen…

US Treasuries, and by extension equities, are priced for Fed rate cuts starting in March. For this scenario to unfold, inflation needs to drop, and at a robust pace too. A familiar tune on Wall Street is that markets are too confident about the inflation/Fed cuts prospect.

Overnight, the release of the December CPI print delivered a negative surprise, i.e. inflation is not falling as quickly as assumed/hoped for (choose your angle). It'll be interesting as to how financial markets respond in the days ahead. Overnight price action was one of disappointment and if SPI futures are a correct indication, the Australian share market is due for a retreat today.

The response from the team of economists at CIBC:

"Today’s December CPI showed mild price pressures and more progress of core inflation to the Fed’s target but at a slower pace than the FOMC would have liked. Core prices rose by 0.3% m/m, in line with expectations and the November reading. Headline inflation was also 0.3%, above expectations of 0.2% gain and the 0.1% reading from a month prior.

"In year-over-year terms, core inflation fell one notch to 3.9% and headline inflation increased to 3.4% from 3.1% in November. Core services prices rose by 0.5% for the second consecutive month, with shelter inflation running at the same pace and having accelerated for three months in a row. The lags from supply chain normalization and restrictive monetary policy kept core goods prices flat in the month.

"The stickiness in shelter inflation will catch the eye of the FOMC but with a smaller weight in the Fed’s preferred measure of inflation – core PCE – that likely will not be enough to hold back the gradual shift in the Fed’s focus from price stability to its broader dual mandate objectives.

"Even though we are not fully there yet in year-over-year terms, the substantial progress on core inflation momentum will make the Fed less willing to tolerate a material slowing of the economy. We expect the Fed to start easing policy in the second half of this year."

All in all, markets moved a little though not substantially and US Treasuries are still priced for a Fed rate cut in March. Were this to change, volatility will pick up noticeably.

The response from deVere Group CEO Nigel Green: No Fed pivot in sight; markets got ahead of themselves.

Inflation remains on investors' mind with China's release scheduled for later today.

Gold and oil managed to close higher, but there's still no appetite for big moves in commodity markets. Both BHP Group ((BHP)) and Rio Tinto ((RIO)) shares closed lower in the US.

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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