The Overnight Report: No December Hike?

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

By Greg Peel

The Dow closed up 42 points or 0.2% while the S&P rose 0.2% to 2555 and the Nasdaq gained 0.3%.

Have we been here before?

Well there you go. For the prior two weeks almost every session on the local market began with the futures pointing up in the morning and index closing down. All the way down until it found support at 5650. Yesterday morning the futures said down, so we closed up.

It had appeared, given the previous two sessions’ activity, that 5750 was the new resistance level. Not so, it seems. Yesterday the futures said down -15 and we immediately opened up 30 without so much as a stumble. And then stayed there all day.

The primary driver appears to have been the release of Westpac’s monthly consumer confidence survey.

Westpac’s consumer confidence index has risen 3.6% this month to 101.4, just below the long run average of 101.9. After several months of weak confidence, August and September have seen solid rebounds.

CBA’s economists put this down to the recent strong run in jobs growth, and lift to the minimum wage. An interesting further suggestion is that given consumers pay their energy bills quarterly, the shock of the last one has dissipated, but there is another one due soon.

Outside of bank issues and volatile commodity prices, a lack of consumer confidence had been one factor holding the Australian stock market back. Despite our economy’s reliance on exporting rocks, consumers do account for more than 50% of GDP. Businesses have been happy all year but consumers have been biting their nails, worried about house prices, energy bills, excessive debt and low wage growth. But now, apparently, they’re feeling a little happier.

Consumer discretionary rose 1.4% yesterday and staples chimed in with 0.7%. Westpac’s ((WBC)) CEO told a parliamentary committee interest only loans are not a problem so the banks rose 0.5%. This is despite APRA announcing it will crack down on super funds, however the banks appear now to be intent on hiving those off.

Indeed, every sector finished in the green yesterday, implying market-wide buying. Even materials managed a 0.2% gain despite the iron ore price dropping -4%. A forecast update across the full commodity spectrum from Macquarie, featuring some substantial increases, likely helped.

Utilities have been the worst performer of late, and they rose 0.8%. Some individual positive news stories among stocks saw industrials up 1.3%.

So once again we have the 5800 brick wall in sight. What might push us through. US earnings? The futures are down -2 this morning which is not much of an indication. If they were down -15 I’d say we’ll hit 5800 this morning.

All about rates

Wall Street spent the morning trading slightly higher in a tight range. It was not until the afternoon’s release of the minutes of the September Fed meeting that the major indices received a boost, and all three yet again closed at record highs.

While consensus still has the Fed hiking in December, the minutes went some way to alleviating fears that the central bank was about to embark on a tightening push that could derail the stock market, via the mix of rate hikes and balance sheet tampering. It all comes down to inflation, or lack thereof.

FOMC members agreed that it is going to take longer to get back to the target rate of 2% inflation than previously thought. On that basis, some members suggested, it would be sensible to be patient and to continue to let the data provide the indication. Indeed, a December hike is not set in stone.

If that is the case, talk of an inverted yield curve is perhaps premature. Some commentators have been warning this could be the outcome if the Fed goes too hard, too fast. An inverted yield curve occurs when short term rates are higher than long term rates, or in simple metrics, the two-year bond yield is higher than the ten.

This implies money is tight, hence businesses cease any investment plans. Bank margins are under threat of turning negative. Inverted yield curves are harbingers of recession. They were last seen in the US in 2007, 2000, 1989 and for a period in the seventies – all recession events.

But if the Fed is going to be patient, well, that’s comforting. Hence Wall Street closed on its highs.

Wall Street is now poised ahead of tonight’s release of earnings results from JP Morgan (Dow) and Citigroup.

Commodities

West Texas crude continued upward last night, and is up another US46c to US$51.31/bbl.

Base metals had another mixed session, with aluminium up 1.5% and zinc down -1.5%.

The iron ore price is down another -US$1.30 at US$57.80/t. It didn’t much matter yesterday, will it matter today? The falls will not have concerned analysts, who have been forecasting a price in the 50s for a while now.

Gold is currently the little engine that could, incrementally chugging its way back towards 1300 as the US dollar continues to drift back down. The dollar index is down -0.4% at 92.91 and gold is up another US$4.20 at US$1292.40/oz.

The Aussie is up 0.2% at US$0.7793.

Today

The SPI Overnight closed down -2 points.

Local housing finance data are due out today.

Bank of Queensland ((BOQ)) will release its earnings result.

Magellan Financial ((MFG)) and Transurban ((TCL)) will hold AGMs and Whitehaven Coal ((WHC)) will release a quarterly production report.

Rudi swapped his scheduled appearance on Switzer TV yesterday and thus won't have to travel to Macquarie Park late in the evening. He'll still travel around noon to appear on Sky Business from 1-2pm.

****

The Australian share market over the past thirty days…

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms