The Overnight Report: Confirmation

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

By Greg Peel

Good News Good?

When the Australian unemployment rate jumped up suddenly to 4.1% in January, economists were sceptical, largely writing off the data as misleading given changing seasonal patterns not yet accounted for in the ABS’s seasonal adjustment model.

That scepticism was confirmed yesterday when the February unemployment rate fell right back to 3.7%, just as it was six months ago, on the addition of 116,500 jobs, when economists had forecast 40,000.

The market had liked the January numbers, as they implied the RBA would be more likely to cut rates at some point rather than hike again, as was threatened at the February meeting. But it appears yesterday, the market liked the February numbers too.

The ASX200 had shot up 80 points from the bell, following Wall Street relief that the Fed was still on track to cut rates this year, before giving back -50 points to 11.30am, when the jobs numbers were released. Then it closed up 86.

If bad news (higher unemployment) was good last time, why was good news good this time? Surely persistently low unemployment would hold back the RBA from cutting?

This from Westpac’s economists:

“On balance, the latest update does not materially shift our view. As the slowdown in activity perseveres and broadens across the domestic economy, conditions in the labour market are softening. Demand for labour is moderating and is not expected to keep up with growth in labour supply, seeing the unemployment rate [rise] over the course of this year.

“Employers that are seeking to adjust labour usage are predominately doing so by reducing average hours worked. At this stage, it looks as though there is further scope for this to run into mid-year. Growth in employment will continue to slow within this context, but a transition into material economy-wide declines in employment seems unlikely at this stage.”

So, no change to the underlying trend forecast.

The Aussie ten-year yield nevertheless rose 4 points, but the stock market didn’t care. Effectively all sectors closed in the green yesterday bar one. I say effectively because healthcare closed down -0.2%. Cochlear ((COH)) went ex and CSL shares refused to follow the rest. Utilities was the outlier (-0.6%), on announced cuts to government-set power prices.

Otherwise, six of eleven sectors rose by more than 1%, with banks the star on the day (+1.7%). Lower unemployment equals less chance of loan defaults.

It’s also good news for discretionary (+1.5%) as employed people have money to spend. That in turn is good for retail REITs, and real estate rose 1.3%.

Materials rose 1.3% following a jump in the gold price overnight, and another big bounce-back for iron ore yesterday.

There may also have been an impact form yesterday’s expiry of futures and options.

Among individual stocks, Webjet ((WEB)) won the session after booking a 9.2% gain following its investor briefing.

All in all a risk-on session, although unlike Wall Street, we’re not yet back at the all-time high. Wall Street has kicked on again last night, but our futures are down -14 points this morning.

Following On

Remember Reddit, the social media platform that fed the meme stock craze back in early 2021? It IPO’d last night and closed up 50%.

Not so good news for Apple nonetheless, with the US Department of Justice taking the company to court over its alleged smart phone/app store monopoly. Apple shares fell -4%, which adds a big hit to all three major indices, worth around -0.25% for the S&P500.

But the S&P still managed a 0.3% gain, as Wall Street confirmed its relief over the Fed sticking to its guns, following on from the initial post-Fed reaction on Wednesday night.

Once again the Dow (+0.7%) and Russell small cap index (+1.1%) outperformed as the Nasdaq underperformed (+0.2%), to mark another session in which tech took a back seat to everything else.

The US two-year yield, which fell -9 points post-Fed, did nevertheless claw back 4 points to 4.64%.

Nike is seen as a good indicator of the strength of the consumer. It reported after the bell last night and the shares rose 4%. FedEx is seen as a bellwether for the economy in general, and it also reported and the shares are up 12%.

Everything is rosy as the S&P500 pushes on through ever new all-time highs. Indeed, all of the S&P, Dow and Nasdaq marked back-to-back highs last night – the first time that has happened since November 2021.

So what is going to derail Wall Street? Ironically, there’s a growing belief the first Fed rate cut will be the trigger for a long-awaited correction, assuming Wall Street keeps on keeping on from here, on a good old-fashioned sell-the-fact trade.

Meanwhile, the Swiss National Bank cut its rate last night, while the Bank of England held firm, but saw rate cuts ahead.

Commodities

Iron ore posted a second day of bounce-back gains which are looking a lot like short covering in action.

The oils fell back again on signs of weakness in US gasoline demand.

The Aussie is down -0.2% at US$0.6571, which is rather at odds with the fall in unemployment, but the US dollar has shot up a full 0.6% in another follow-on from the Fed.

Today

The SPI Overnight closed down -14 points or -0.2%.

The RBA will release a Financial Stability Review today.

The Australian share market over the past thirty days…

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