The Overnight Report: New Highs Before CPI

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The S&P500 and Nasdaq reached all-time-highs with robust support for potential Oracle AI winners. 

After a positive day on Wednesday, ASX200 futures are pointing to a soft start for Thursday.

Good Morning,

The Australian market rose on Wednesday, despite a heavy sell off in resource stocks.

The ASX200 rose 27pts or 0.3% to close at 8,803.

The Materials sector fell -1.7%, pulled down by iron ore miners and shares in lithium-related companies.

What happened overnight, NAB Markets Today Research extract

The US PPI unexpectedly declined for the first time in four months, with the headline index down -0.1% m/m (0.3% exp.) and core PPI also falling -0.1% (0.3% also exp.). The surprise was driven by a sharp drop in trade margins, offsetting higher goods prices from tariffs. While the softer print supports the case for Fed easing, underlying service sector inflation remains sticky, with portfolio management fees and airline fares both higher on the month.

Reaction to the data triggered a move lower in US Treasury yields with the move initially driven by the front end the curve. The two-year Treasury yields fell to an overnight low of 3.51%, but later in the session in edged back up, ending the day at 3.54%, -1.6bps lower on the day.

In addition to the PPI reaction, the 10yr rate was also supported by a well-received US$39bn 10-year note auction, clearing -1bp below prevailing market levels. After trading to an overnight low of 4.02% the benchmark yield ended the day at 4.04%, -4bps lower on the day. European bonds were steady ahead of the ECB, with German bunds at 2.65% and the French-German spread unchanged.

As for Fed pricing expectations, pricing for next week’s meeting was unchanged at -28bps while the cumulative pricing for the end of the year edged up another 2bps to -68bps. Attention now turns to tonight’s CPI, which will be key for the Fed’s preferred PCE deflator. President Trump, meanwhile, renewed calls for a “big” rate cut, adding to the political noise around the central bank.

On related news, yesterday a US judge temporarily blocked Trump’s attempt to remove Fed Governor Lisa Cook over mortgage fraud allegations, allowing her to attend next week’s FOMC. The legal wrangling is likely to end up at the Supreme Court, but for now, Governor Cook will be allowed to attend and vote at next week’s FOMC meeting. Ironically, favouring Trump’s position as she is expected to support a Fed cut.

Yesterday we also learned China’s August CPI slipped back into negative territory at -0.4% y/y, below expectations, as food price deflation deepened. Core inflation edged up to 0.9%, but this was largely due to temporary factors such as a consumer goods trade-in scheme. PPI deflation eased to -2.9% y/y, but with weak domestic demand and persistent overcapacity, there’s little sign of a near-term turnaround. Metal prices have risen on speculation of production cuts, but broader price pressures remain subdued.

Poland’s military shot down Russian drones that violated its airspace during a major assault on Ukraine, marking the first direct engagement between NATO and Russian assets since the war began. The incident prompted Warsaw to invoke Article 4 of the NATO treaty, triggering consultations and offers of concrete support for Polish air defences from allies including the UK, France, and Germany. The episode highlights the fragility of NATO’s eastern borders and the risk of escalation as Russia tests the alliance’s resolve.

Moving to equities, the S&P500 rose 0.3% with mixed sector performance. Energy and IT sectors led the gains, up around 1.77% while consumer discretionary and staples fell -1.58% and -1.5% respectively. Meanwhile the Nasdaq100 was little changed, and the Dow Jones fell -0.5%.

In company news, Oracle soared over 35% after unveiling a bullish outlook for its AI cloud business, signing a US$300bn deal with OpenAI. Nvidia and other AI names also rallied, while Boeing reached a tentative wage deal and JPMorgan braced for losses tied to subprime auto lending. European indices were flat, while Asian markets advanced, led by tech gains in Japan and Hong Kong.

The US dollar dipped on the PPI surprise but quickly recovered, with the DXY little changed on the day. The AUD led G10 gains, up 0.43% to 0.6613, after trading to an overnight high of 0.6635 and is up 1.07% over the past 5 trading days. 

Oil prices rose nearly 2% as Middle East tensions flared, with Brent at US$67.62 and WTI at US$63.80. Gold was steady at US$3,647.80, up 1.16% on the week. Base metals were mixed: copper and zinc gained, while iron ore and thermal coal softened. On the week, iron ore is up 3.5%, while coal is down over -5%.

And in other news, early this morning Bloomberg reported Mexico is looking to apply tariffs of as much as 50% on cars and auto parts, as well as steel and textiles from China and other countries with which it does not have a trade agreement. 

Economy Minister Marcelo Ebrard said “We are going to take it higher, which the World Trade Organization allows us to do, which is up to 50%. Why? Because the prices at which they are arriving in Mexico are below what we call reference prices,” he said.

“The main objective is to protect jobs.”

Commodities Update, ANZ Bank, Australian Morning Focus extract

Crude oil prices gained amid concerns of further disruptions to Russian supplies. The incursion of Russian drones into Polish airspace raised concerns the US would retaliate with further restrictions on Russia’s energy supplies.

A cryptic social media post from President Trump saw traders quickly cover bearish bets on crude. This comes after he told European officials he’s willing to add new tariffs on India and China, top importers of Russian crude, in an effort to get Moscow to negotiate with Ukraine. However, he made it clear he would only do this if EU nations followed suit.

Geopolitical tensions in the Middle East remain high. Israel attacked military bases in Yemen manned by Houthi operatives, a day after Israel’s strike on Hamas leaders in Doha. However, the gains from rising geopolitical tensions were limited amid signs of weakening demand in the US.

Crude oil stockpiles rose 3,939kbbl last week to 424.6mbbl, the second consecutive week of inventory builds. The increase comes as refinery crude runs ticked down as the peak summer season tapers off. US gasoline demand also pulled back sharply, sinking below 9mb/d for the first time in a month.

China’s stockpiling of crude oil may also be slowing. After soaking up surplus barrels, we expect China’s restocking to slow sharply in Q4 due to worsening economics in the form of competition from new capacities and headwinds affecting domestic demand. This should see the market move into a sizeable surplus, putting downward pressure on prices. 

European gas futures edged higher as traders assessed the risks around Russian gas supplies in the face of geopolitical tension. The market reaction to the events was muted as neither attack poses an immediate threat to flows. Trump said top LNG exporter Qatar is a strong ally and friend of the US.

Some viewed that as a sign the conflict is unlikely to expand and disrupt shipping in the Strait of Hormuz, a key waterway for LNG trade. The prospect of renewed sanctions on buyers of Russian gas failed to raise concerns. Energy trader Vitol expects increased uptake of Russian sanctioned LNG cargoes by China, which can further impact the Asian, and global gas balances.

North Asia LNG prices also gained amid concerns of weaker supply. Daily exports of Indonesian and Australian LNG have trended lower since mid-August.

Copper ended the session above US$10,000/t as traders weigh up supply risks in Indonesia. The giant Grasberg copper mine in Indonesia closed to free workers trapped underground. A prolonged disruption could tighten the market further.

Sentiment was also supported by the prospect of stronger demand in China. Factory-gate deflation eased for the first time in six months, a sign of progress in the government’s anti-involution campaign.

Gold gained after US wholesale inflation unexpectedly declined in August for the first time in four months. This saw traders raise expectations of interest rate cuts, with three cuts almost fully priced in for the rest of the year. In combination with the geopolitical tension and economic uncertainty, we expect investors will continue to gravitate toward haven assets like gold and silver.

Corporate news in Australia

-Hostplus has sold around -2% (12m shares) of its 4% stake in Lendlease Group ((LLCC) while pushing its removal from the Australian Prime Property Fund.

-Australian Retirement Trust has placed $650m into Macquarie Group’s ((MQG) green energy fund for clean energy projects.

-Nvidia has invested in PsiQuantum in its latest US$1bn funding round, boosting valuation to US$7bn.

-OpenAI executives are expected to meet Treasurer Chalmers over potential AI investments.

-US defence firm Anduril has won a $1.7bn Australian navy deal to build autonomous Ghost Shark submarines.

-Bank of Queensland ((BOQ)) has appointed Bank of America for a $3.8bn loan sale.

-News Corp ((NWS)) and OpenAI are in talks on Realtor.com real estate product.

-AGR Partners has sold circa 5% of Ridley Corp ((RIC)) in a $54.4m block trade.

On the calendar today:

-JP Aug PPI

-EZ ECB Rate

-US Aug CPI

-US Aug Jobless Claims

-AIR NEW ZEALAND LIMITED ((AIZ)) ex-div 0.96c

-AUSTIN ENGINEERING LIMITED ((ANG)) ex-div 0.90c (100%)

-BREVILLE GROUP LIMITED ((BRG)) ex-div 19.00c (100%)

-BWM ex-div 0.50c (100%)

-EARLYPAY LIMITED ((EPY)) ex-div 0.65c (100%)

-FREIGHTWAYS GROUP LIMITED ((FRW)) ex-div 19.12c (39%)

-JOYCE CORPORATION LIMITED ((JYC)) ex-div 11.50c (100%)

-JOYCE CORPORATION LIMITED ((JYC)) ex-div 5.50c (100%)

-KOGAN.COM LIMITED ((KGN)) ex-div 7.00c (68%)

-MCMILLAN SHAKESPEARE LIMITED ((MMS)) ex-div 77.00c (100%)

-NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) ex-div 4.00c (100%)

-NINE ENTERTAINMENT CO. HOLDINGS LIMITED ((NEC)) ex-div 49.00c (100%)

-NAVIGATOR GLOBAL INVESTMENTS LIMITED ((NGI)) ex-div 4.68c

-NZME LIMITED ((NZM)) ex-div 2.71c

-PEPPER MONEY LIMITED ((PPM)) ex-div 6.40c (100%)

-PERPETUAL LIMITED ((PPT)) ex-div 54.00c

-SGH LIMITED ((SGH)) ex-div 32.00c (100%)

-SPARK NEW ZEALAND LIMITED ((SPK)) investor briefing

-WESTGOLD RESOURCES LIMITED ((WGX)) ex-div 3.00c

-XRF SCIENTIFIC LIMITED ((XRF)) ex-div 4.50c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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