The Overnight Report: US Inflation Softens

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

Nasdaq was buoyed by a softer-than-expected June CPI print, while a warning from IBM weighed on the Dow Jones.

US major banks delivered robust quarterly results, led by Goldman Sachs.

After another flat session on the domestic market, ASX200 futures are pointing to a positive start on Wednesday.

Good Morning,

The ASX200 finished unchanged on Tuesday, once again rallying from its intraday lows.

Energy rose 2%, while Property fell -1.6%.

In the US, Goldman Sachs shares gained 9% after delivering strong quarterly results.

IBM shares fell -25.21%, their worst trading day on record, after the CEO issued preliminary guidance indicating a second-quarter earnings miss, dragging software stocks lower.

SK Hynix ADRs rallied more than 27%, and SpaceX shares fell another -2.2%.

Today’s Big Picture, J.L. Bernstein extract

Inflation Cooled and the Fed Got Some Room

June prices came in below what economists expected, and once you strip out food and gas, prices did not rise at all.

Traders now see a July rate hike as unlikely, after betting it was close to a coin flip yesterday.

Kevin Warsh told Congress the report was good but one month is not a win.

Better data, same Fed.

IBM Just Told You Where Corporate Money Is Going

IBM warned its quarter will miss, and the reason matters more than the miss.

In the last weeks of June, its customers pulled money out of software and mainframes and spent it on servers, storage and memory chips before prices climb.

Chip makers and cybersecurity names collected that money today.

Software companies lost it.

Banks Had Their Best Quarter Ever and the Stocks Still Split

Five big banks earned more than US$49 billion between them.

JPMorgan made the largest quarterly profit in US banking history and Goldman set its own record.

Citigroup and Wells Fargo still finished lower.

The money came from trading desks, not from lending, and investors noticed which one is the real business.

ANZ Bank Australian Market Focus, extract

Equity markets rose and US bond yields fell following the CPI miss, as markets pared expectations for near-term rate hikes from the Fed. 

They now see around a 10% chance of a rate hike at the FOMC’s July meeting, down from 40% prior to the release. 

Oil pared earlier gains following President Trump’s comments that the US will not implement a 20% fee for Hormuz transits. 

The S&P500 was up 0.38%. The EuroStoxx50 ended its session up 0.1%, while the FTSE 100 gained 0.3%. 

The yield on the US 10y note fell around -3.2bp to 4.59%. 

WTI lifted 0.6% to US$79.9/bbl. Gold was stronger at US$4,050.4/oz. 

US headline CPI fell -0.4% m/m, weaker than the consensus of -0.1% m/m. The annual rate eased -0.7ppt to 3.5% y/y. The core CPI was unchanged (0.0% m/m) in June, below the consensus of 0.2% m/m. 

The annual rate eased -0.3ppt to 2.6%. Core goods prices fell -0.1% m/m, following a 0.1% m/m fall in May. Prices in six of eight major spending categories declined.

Core services ex housing (‘supercore’) prices fell -0.2% m/m, with medical services, transport services and education and communication services prices all declining in the month. Shelter prices rose 0.1% m/m. 

The case for a July rate hike from the Fed has evaporated following today’s soft inflation data. Both headline and core month-on-month inflation data were the weakest since 2020.

Prior to today’s data, following Governor Waller’s hawkish remarks yesterday and renewed upside inflation risks from oil, there was certainly a scenario in which an upside surprise in core inflation could have put a July rate hike on the table. 

It’s worth considering that scenario before reading too much into one month of soft data. The September and October Fed meetings are still very much ‘live’.

Our expectation is that we will continue to see progress on underlying inflation back towards the 2% target in coming months, and the Fed will remain on hold this year. 

Today’s data brought further evidence that tariff passthrough has run its course, with another month of weak core goods inflation, and outright deflation in some import-heavy components most sensitive to tariff impacts.

Core services ex-housing (‘supercore’) inflation was also weak, and encouragingly the weakness was broad-based.

Shelter inflation was soft. Forward indicators suggest that will remain the case for some time.

Upside risks have not gone away, and data will need to be analysed for signs of inflation pressures broadening.

The Long View: Not a Straight Line, Clearbridge, Jeffrey Schulze extract

While the path forward for stock-bond correlations may be up for debate, one thing that isn’t is that equity market valuations are elevated, with the S&P500 trading above 20x forward (expected next-12-month) earnings. 

Higher valuations are the market equivalent of climbing at altitude: progress is still possible, but there is less room for missteps.

However, rich multiples have become the “new normal” since the pandemic, with the index trading above 20x forward earnings 64% of the time since first crossing that level in April 2020.

Importantly, elevated P/Es have not derailed returns, with the S&P500 rising 157% over those 74 months, or 16.6% annualised, roughly twice the long-term average. 

Strong earnings have been the oxygen tank powering the market’s climb in the face of lofty valuations, with next-12-month earnings expectations up 155% cumulatively over the same period. 

Simply put, the S&P500 appears to be in a higher valuation regime, with earnings doing all of the heavy lifting behind the market’s climb higher—a dynamic we expect to continue in the second half.

Over the course of the summer, we expect investor attention to shift towards this autumn’s midterm elections, which historically have been a source of volatility.

Midterm years can be challenging for equity markets because they introduce political uncertainty. Which party controls Congress (and by what margin) has implications for taxes, regulation, government spending and sector-specific policies.

Historically, the incumbent president’s party loses seats in the midterm elections, increasing the risk of gridlock or slowing the president’s policy agenda. 

This uncertainty has weighed on market returns in the past, with midterm election years delivering the weakest average performance of the four-year presidential cycle at just 4.6.

But political uncertainty, like mountain weather, is only part of the story in determining how navigable the path forward may be.

Although equities have historically posted lower annualised returns in the second year of presidential cycles, the business-cycle backdrop ultimately matters more than the policy calendar. 

Today’s earnings outlook is much stronger than the typical midterm-year precedent. Sell-side consensus expects 2026 EPS growth of 23.9%, nearly three times the historical midterm-year average of 8.3%.

In our view, that earnings strength is a powerful tailwind that could help make 2026 the exception to the rule.

With the economy on solid footing and several headwinds fading, the market’s recent period of consolidation looks less like a warning sign and more like a normal part of the climb higher. 

After a historically strong second quarter, a period of consolidation is not atypical; it is the market’s version of catching its breath before embarking on the next ascent.

Most importantly, the improving fundamental backdrop should boost corporate earnings, which we believe will continue to be the primary driver of the equity market’s advance. 

The potential for lower Treasury yields is a possible tailwind, particularly with the market trading at lofty valuations, but not a requirement for further upside, in our view. 

With the economy bolstered by the strengthening labour market, earnings robust and inflationary pressures easing due to lower oil prices, we believe the market is positioned to keep climbing in the second half of 2026.

Inflation, Gold, and Geopolitics: Macro back in focus, RBC Capital, Sam Crittendon 

Corporate news in Australia:

• Genesis Minerals ((GMD)) will acquire Vault Minerals ((VAU)) in a $5.6bn gold “merger”
• Amwins and Dragoneer have confirmed KKR has joined their consortium bid for Steadfast Group ((SDF))
• Genesis Capital is exploring a bid for Mayne Pharma Group’s ((MYX)) Salisbury manufacturing plant following the collapse of Cosette’s takeover proposal
• Private equity firms are assessing a potential buyout of Orora ((ORA)) 
• TPG Capital has acquired Australian energy retailer Zembl for more than $250m following a strong year of private equity exits

On the calendar today:

-JP May Core Machine orders

-CH GDP, Unemployment

-EZ May Ind Prod’n

-US Fed Beige Book

-US Jul Empire Mfg

-US June PPI

-AMPLITUDE ENERGY LIMITED ((AEL)) Qtrly update

-AUCKLAND INTERNATIONAL AIRPORT LIMITED ((AIA)) Qtrly Update

-EVOLUTION MINING LIMITED ((EVN)) Qtrly Update

-RIO TINTO LIMITED ((RIO)) Qtrly Update

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

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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