The Overnight Report: Stagflation?

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World Overnight
SPI Overnight	7616.00	– 26.00	– 0.34%
S&P ASX 200	7683.00	– 0.50	– 0.01%
S&P500	5048.42	– 23.21	– 0.46%
Nasdaq Comp	15611.76	– 100.99	– 0.64%
DJIA	38085.80	– 375.12	– 0.98%
S&P500 VIX	15.37	– 0.60	– 3.76%
US 10-year yield	4.71	+ 0.05	1.16%
USD Index	105.58	– 0.11	– 0.10%
FTSE100	8078.86	+ 38.48	0.48%
DAX30	17917.28	– 171.42	– 0.95%

By Greg Peel

Wednesday

Cheering on an ongoing recovery on Wall Street, the ASX200 took the risk and rallied 40 points on Wednesday morning, ahead of the 11.30am release of the March quarter CPI data. Ten minutes later, the index was down -4 points on the day.

Buyers made two attempts through the afternoon to shrug off the CPI and push higher once more, but both were defeated. The battle ended in a draw, with the ASX200 down -1 point at the close.

The headline CPI rose by 1.0% in the March quarter to 3.6% annual, when 0.8% and 3.5% were forecast. The core CPI also rose by 1.0% to 4.0%, when 0.8% and 3.8% were expected.

In the December quarter, the headline had risen 0.6% to 4.1% and the core 0.8% to 4.2%. So inflation still came down – just not as much as forecast. Goods inflation continues to ease, so we can blame insurance, healthcare, education, and rent for providing the stickiness.

The “misses” don’t seem earth-shattering, but the US ten-year yield jumped 14 points to 4.59% and the two-year 18 points to 4.07% — -28 points shy of the RBA’s 4.35% cash rate, implying confidence in at least one rate cut ahead. But when?

Economists had already mostly lined up around the November-December period, and have not yet panicked, but suggest the risk is greater those forecasting no cut this year may be right.

Rate-sensitive sectors were the losers on Wednesday, unsurprisingly, but not manifestly. Industrials and utilities saw the greatest losses (-0.6%), while smaller falls were booked in real estate, discretionary and technology.

In discretionary, we note Kogan ((KGN)) provided a quarterly update and crashed -27.5%, but it’s out in the ASX300.

The surprise were the banks – up 0.4% to be the sector winner on the day. Take your pick: higher for longer rates mean greater loan loss risk; or higher for long rates rates mean better net interest margins.

Staples played the defensive (+0.3%), while healthcare was flat, energy rose 0.2% and materials managed to fall only -0.1% as gold miners steadied and Tesla’s result buoyed lithium miners.

So a flat close looked pretty good under the circumstances. The bad news is the futures fell -58 points on Wednesday night. Either traders had more of a think about the inflation data and decided to sell, or Meta’s aftermarket result sparked fear of a greater pullback on Wall Street.

Wednesday Night

The US ten-year yield drifted up 5 points on Wednesday night, which had the indices modestly lower all session until the last hour, when they squared up for a flat close ahead of Meta’s aftermarket earnings result.

Tesla, which had reported in Tuesday night’s aftermarket, rose 12% despite missing on the top and bottom lines. The result was expected to be weak, but what helped was the subsequent conference call, in which Elon spoke of a renewed push into more affordable EVs, having previously ditched plans for a cheap and cheerful model, and did not, thank God, bang on about robo-taxis.

Telsa has to go cheap, because that’s where the Chinese are winning.

Alas, Meta posted a beat, but came up short on guidance. And if Elon managed to say the right things in the conference call, the Zuck didn’t. He banged on about investments in glasses and mixed reality – areas in which Meta does not make money.

The stock fell -16% in the aftermarket.

Chipotle Mexican is seen as a bellwether discretionary stock in the fast food sector. It reported after the bell and rose 2%.

Thursday Night

The US GDP grew only 1.6% (annual) in the March quarter according to the first estimate, when 2.4% was forecast.

The personal consumption & expenditure (PCE) component rose by 3.4%, up from 1.8% in the December quarter, suggesting inflation has re-accelerated. The separate March quarter PCE data are out tonight.

Wall Street’s rally this year has been sustained, even as rate cut expectations have drifted down from six to three to maybe only one, on the basis the US economy is stronger than had been expected in the face of higher rates. Hence, higher for longer rates don’t matter.

Doubt has crept in more recently, as questions arise as to whether there’ll be even one rate cut this year, stalling the rally, and last night saw an abrupt sell-off from the open.

The US ten-year yield rose 5 points to 4.71%.

However, if the US economy does weaken, that also provides the Fed with an incentive to cut. Much rests on tonight’s PCE numbers. Suffice to say traders turned what was a -700 point loss for the Dow early on into a -375 point loss at the close.

The combination of a weaker economy and rising inflation takes us back to that scary buzzword that had for some time been put back in its box – stagflation. That’s tough for the Fed to respond to.

There were, of course, earnings results to consider as well.

Having reported in Wednesday night’s aftermarket, Meta shares clawed back to a -10.5% loss on the day. Meta had been up 40% year to date, and 130% year on year.

Reporting during the session, Newmont Corp ((NEM)) shares rose 12.5% on its US listing, while ResMed ((RMD)) shares fell -0.2% ahead of its quarterly release. ResMed shares are up 9% in the aftermarket with the quarterly update showing stronger-than-forecast margins.

Reporting in last night’s aftermarket, Microsoft shares are up 4% and Google shares are up 13%.

All is not thus lost, although serial underperformer (and Dow component) Intel is down -8% on its result.

Also notable during the session was a comeback rally for chipmakers, that had been hit hard previously. Nvidia rose 3.7%.

It’s another big week of earnings next week, with Amazon and Apple just two in the frame.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	2331.70	+ 10.20	0.44%
Silver (oz)	27.39	+ 0.13	0.48%
Copper (lb)	4.46	+ 0.08	1.73%
Aluminium (lb)	1.16	– 0.00	– 0.20%
Nickel (lb)	8.64	+ 0.04	0.46%
Zinc (lb)	1.28	+ 0.03	2.18%
West Texas Crude	83.57	+ 0.21	0.25%
Brent Crude	89.26	+ 0.76	0.86%
Iron Ore (t)	109.68	+ 0.92	0.85%

Note: All price moves are over two sessions.

Base metal prices have regained some life after the earlier sell-off on no rate cut from the PBoC.

The oils appear largely stalled for now, waiting for the next Middle East development.

The Aussie is up 0.5% at US$0.6519 over two sessions.

Today

The SPI Overnight closed down -26 points or -0.3% this morning, but that’s on top of the -58 points lost on Wednesday night.

We’ll see March quarter PPI numbers today.

The Bank of Japan holds a policy meeting.

The US will see the PCE and consumer sentiment.

Newmont Corp and ResMed have reported in the US.

The Australian share market over the past thirty days…

Index	24 Apr 2024	Week To Date	Month To Date (Apr)	Quarter To Date (Apr-Jun)	Year To Date (2024)
S&P ASX 200 (ex-div)	7683.00	1.53%	-2.71%	-2.71%	1.21%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
BXB	Brambles	Upgrade to Hold from Lighten	Ord Minnett
GLN	Galan Lithium	Downgrade to Neutral from Outperform	Macquarie
KAR	Karoon Energy	Downgrade to Hold from Accumulate	Ord Minnett
LIC	Lifestyle Communities	Upgrade to Accumulate from Hold	Ord Minnett
		Upgrade to Neutral from Sell	UBS
S32	South32	Downgrade to Neutral from Buy	Citi

For more detail go to FNArena's Australian Broker Call Report, which is updated each morning, Mon-Fri.

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