The Overnight Report: Too Much, Too Soon

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This story features RESMED INC, and other companies.
For more info SHARE ANALYSIS: RMD
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Rudi Filapek-Vandyck

Greg Peel will return later this month.

Only last Friday, US Treasuries were priced for an 80% certainty the Federal Reserve would deliver its first rate cut as early as March. By today, that percentage has dropped to 50%.

Even though the likes of CommBank recently pulled forward their expected rate cut timing to March, there are plenty of expert voices out there that believe the market is deluding itself. The US economy would have to be staring at the prospect of a deep recession for the Fed to contemplate loosening policy as early and as aggressively as was priced by US Treasuries.

Unfortunately, for investors hoping for a continuation of last year's rally in equities in early 2024, the cold hard reality is financial markets are priced for two contradictions; aggressive Fed tightening and no economic recession.

The good news is, though there are no waterproof guarantees in this game, today's contradiction doesn't by default translate into grave disaster. Individual equities excluded, markets have to date remained relatively sanguine about this month's process of re-adjustment. In Australia, the ASX200 is down around -2.6% in January thus far, though more losses could be on the cards today.

SPI futures are indicating another weak opening awaits the local share market at 10am as US indices continue their retreat. Shares in Australia's major miners are down in excess of -1% in the UK and in the US. ResMed ((RMD)) stands out with a positive move as healthcare is regaining its position as a trusty defensive in times of general weakness.

December retail sales in the US proved stronger-than-expected, further fueling the idea financial markets need to pare back their aggressive positioning. The response is as straightforward as should be expected: US bond yields are up, the US dollar is up, gold and equities in general are down.

Commodities are struggling, also because China is still struggling and the debate about further stimulus and general conditions elsewhere creates a heavily divided market. Iran is increasingly showing its rogue side, which has the potential for a break-out in geopolitical stresses. No doubt, this is increasingly on investors' mind too.

From the economics team at CIBC: "2023 will likely go down as the year of the American consumer's resilience and today's consensus smashing report is a fitting way to end the year. The control group of retail sales which feeds into non-auto core goods consumption in GDP rose by 0.8% m/m, compared to expectations of 0.2%. The prior month was also revised up one tick to 0.5%.

"Total retail sales rose by 0.6% m/m, coming in above expectations of a 0.4% gain and the 0.3% reading in the prior month. The strength was broad-based with increases in 9 of the 13 categories. Some of the largest increases were led by discretionary categories such as clothing, non-store retailers and general merchandise.

"Today’s report will reinforce the view in the FOMC that we do need restrictive policy for some time to allow the labour market to continue rebalancing. The Fed has mostly downplayed the underlying strength in demand, focusing on the improvement in the supply-side of the economy but another strong report will likely lead to a deeper dive and reconsideration of the inflation implications and the drivers of consumption.

"All in all, today's report reinforces our view that the Fed is no hurry to cut rates and policy easing will only begin in the second half of the year."

Also worth noting: corporate results and newsflow is not injecting much oomph in US markets this month. Boeing and Apple are struggling to keep the newsflow positive. Verizon Communications announced a big write-off overnight and Charles Schwab reported a retreat in profits.

On S&P Global's number crunching, Wall Street consensus is now positioned for US companies to report Q4 EPS growth of 0.88% from twelve months ago. This compares with 2.42% growth anticipated only one month ago. Clearly, the trend is in favour of downward adjusting.

On the agenda today are quarterly updates from the likes of Ampol ((ALD)) and BHP Group ((BHP)). Yesterday's release by gold miner Evolution Mining ((EVN)) turned that stock into the day's biggest loser in the ASX300.

Don't be surprised if the general adjustment in Fed rate reduction expectations has further to go than this week (not necessarily in a straight line process).

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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