The Overnight Report: Too Hot To Handle

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

By Greg Peel

Academic

Yesterday saw another battle of the buyers and sellers on the ASX, with the ASX200 up 45 from the open before falling back, having another go by lunchtime and fading away to the close.

It’s all academic. The US CPI came in "hot" last night, US stocks have been sold off and US bonds have been trashed. Our futures are down -65 points this morning.

If accurate, that would take us back a week for the index. But I would not be surprised if the market falls more steeply today than -0.8% suggests.

Yesterday the Aussie ten-year yield fell -5 points. It will be a very different story today. Notwithstanding yesterday’s fall, sector responses were mixed.

Having fallen on Tuesday, yesterday real estate bounced back 1.2% to be the best performing sector. Healthcare rose 1.0% and industrials 0.8%, and utilities put on yet another 0.7%.

Technology fell -1.2%. The banks were down -0.4%.

The driving force yesterday was again materials, up 0.9%, although gold miners ran out of puff. If profits were being taken ahead of last night’s CPI, it was a smart move. Gold finally tipped over last night.

Yet supporting miners today is the Aussie being trashed last night.

We shall see. Otherwise, strap in.

Hope Fades Eternal

The US headline CPI rose by 0.4% in March to 3.5% when 0.3% and 3.4% were expected. The core rate rose 0.4% to 3.8% when 0.3% and 3.7% were expected.

Doesn’t seem dramatic, but it’s the third “hot” monthly print in a row in 2024. Wall Street was already beginning to wind back its Fed rate cut expectations, and now…

The US ten-year bond yield jumped 18 points to 4.54%. The two-year rose 23 points to 4.97%, effectively wiping out one rate cut. Given the current Fed rate of 5.25-5.50%, the bond market is now pricing in only one and a half cuts.

Having started the year expecting six.

Not helping the mood were the minutes of the March Fed meeting, released last night:

“Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent.”

And now inflation is moving higher.

But all is not lost, it seems. Commentators have pointed to the fact Fed rate cut expectations fell from six cuts in January to three cuts more recently, yet the S&P500 continually hit all-time highs. As more talk emerged of there maybe being only two, or even one, ahead of last night’s data, Wall Street stalled but did not buckle.

Now it has buckled, somewhat, but the indices did close off their lows. The S&P500 was down -1.3% at the depths. This reinforces the belief there are buyers just waiting to pounce, and there is plenty of cash on the sidelines. Many a large fund manager has been caught out in 2024 to date, entering the year expecting a recession.

But not only does the landing now look soft, stocks have rallied through the year in the face of rising bond yields.

The question is oft asked: does it matter if the Fed doesn’t cut? If it doesn’t, it means there is no need – no need because the US economy is too strong to justify a cut, and risk boosting inflation once more.

The chance of a June rate cut is now down below 20%. July has slipped to just over 50%. September has firmed, but most agree the Fed would not cut in the last meeting before the election such that the move would appear politically motivated.

That leaves November (after the election) and December.

Tonight brings the March PPI. In February, Wall Street shrugged off the hotter CPI but lost confidence when the PPI also came in hot. Given the response to the CPI this time, a hot PPI is probably not going to make much difference.

Commodities

Metals held on rather well in the face of a 1% jump in the US dollar index.

Gold has finally had a down-day, unable to cope with the jump in US yields.

US intelligence sees a major missile or drone strike by Iran or its proxies against Israel as imminent, possibly coming in the coming days. “If Iran attacks from its territory, Israel will react and attack Iran,” said the Israeli Foreign Minister on X.

Hence the oils rose again.

The move up in the US dollar has rather ended the Aussie’s commodity-driven streak. It’s down -1.7% to US$0.6515.

Today

The SPI Overnight closed down -65 points or -0.8%.

China releases its March inflation numbers today.

The ECB meets tonight.

The US will see the March PPI.

Santos ((STO)) holds its AGM today. Netwealth Group ((NWL)) provides a quarterly update.

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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