Republish: The Overnight Report: Inflated Fears

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World Overnight
SPI Overnight (Jun)	7260.00	– 10.00	– 0.14%
S&P ASX 200	7348.60	– 6.10	– 0.08%
S&P500	4374.30	+ 5.09	0.12%
Nasdaq Comp	14644.95	– 32.70	– 0.22%
DJIA	34933.23	+ 44.44	0.13%
S&P500 VIX	16.33	– 0.79	– 4.61%
US 10-year yield	1.36	– 0.06	– 4.17%
USD Index	92.37	– 0.42	– 0.45%
FTSE100	7091.19	– 33.53	– 0.47%
DAX30	15788.98	– 0.66	– 0.00%

By Greg Peel

Bye now, see you later

It’s “at least” another two weeks of lockdown in Sydney (for “at least” read “until further notice” – it just sounds less scary) and masks back on in Victoria as case numbers grow. More borders shutting down. But the local market does not seemed at all fazed yesterday.

Discounting a flat session for REITs, all sectors closed in the green yesterday, bar one. But that one rather did it in style.

The tech sector fell -2.7%, led by Zip Co ((Z1P)), down -11.4%, Afterpay ((APT)) down -9.6% and Sezzle ((SZL)) down -10.3%. I sense a theme.

I had flagged yesterday the announcement of Apple partnering with Goldman Sachs to launch a new BNPL product in the US. Then to rub salt into the wound, PayPal – already a strong BNPL competitor in the US — announced it will bring its Pay-in-4 service to Australia, which features, no sign-up fees, no interest and no late payment fees (conditions apply).

Who’s next? Oh, Humm Group ((HMM)), the artist formally known as Flexigroup, has teamed up with Westpac NZ ((WBC)) to launch an NZ service called bundll, using the Mastercard network.

bundll?

Dark glasses this morning on the UBS desk. Aside from the capital intensity issue of BNPL in general, UBS has long cited competition as a reason for unrealistic valuations. But competition must eventually bring in a to-date unconcerned RBA. BNPL users are not switching from one service to another thanks to competition, they are using all of them together. And each service would be unaware of the debts amassed elsewhere.

Back in the real world, investors ignored both lockdowns and a weak session on Wall Street overnight in modestly buying all other sectors, albeit with a defensive bent. The exception to modesty was utilities, which jumped 3.3%.

Utilities is the smallest of the sectors, but as the world enters a government infrastructure spending binge anything infra is currently hot property. A press report yesterday suggested Spark Infrastructure ((SKI)) is the next target. Its shares rose 7.8% before the company called a trading halt.

APA Group ((APA)) is one of the sector’s biggest companies (gas pipelines). It rose 4.3% on no news.

Otherwise, consumer staples (+0.9%), industrials (+0.6%) and telcos (+0.5%) were in demand, as were materials (+0.7%). The latter is actually a flag-waver for cyclicals, but is closely tied to infrastructure plans.

The banks (+0.1%) and healthcare (+0.2%) largely sat this one out.

Having responded nervously to another hot CPI number on Tuesday night, Wall Street went the other way last night on an even hotter PPI, thanks to Jerome The Rock Powell.

Our futures are down -10 points this morning.

We shall not be moved

US producer price inflation increased 7.3% in June, having risen 6.6% in May, year on year. Again, the number meaningfully exceeded forecasts.

The major indices were modestly lower in the morning, but all eyes were on Fed chair Jerome Powell as he made his testimony to Congress. Surely the Fed must change its tune?

No. There will be no change to Fed policy. Powell did admit the recent inflation numbers were a bit more excessive than the FOMC had anticipated, but not enough to shift focus. If such numbers do linger longer than expected then yes, the Fed will act. But not yet. For now, it’s all about getting unemployment down.

On that note, the US ten-year yield, which had risen 5 basis points to 1.42% on Tuesday night thanks to the hot CPI, fell -6 points last night to 1.36%.

The major indices headed north again in the afternoon, albeit waning to the close. Despite lower yields, the Nasdaq slipped into the negative.

This despite a 2.4% gain for Apple, to yet another record high. The company announced it will increase iPhone production by 20%, and advised its component providers to get cracking.

This is not, however, being seen as an attempt to meet a sudden surge in demand. More of an inventory building exercise to stay ahead of chip and other shortages plaguing all things tech, including autos.

While Apple did not prop up the Nasdaq, it did prop up the Dow.

So in the wash-up, Wall Street is happy for now to go with the Fed, but still not ultimately convinced of just how transitory this inflation “pop”, as the SanFran Fed president described it, will prove.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1827.30	+ 20.00	1.11%
Silver (oz)	26.23	+ 0.27	1.04%
Copper (lb)	4.20	– 0.01	– 0.14%
Aluminium (lb)	1.13	– 0.01	– 0.56%
Lead (lb)	1.04	– 0.01	– 0.80%
Nickel (lb)	8.43	+ 0.02	0.24%
Zinc (lb)	1.32	– 0.00	– 0.14%
West Texas Crude	73.13	– 2.12	– 2.82%
Brent Crude	74.59	– 1.91	– 2.50%
Iron Ore (t)	217.85	0.00	0.00%

The US dollar had jumped up on Tuesday night’s CPI result, but has fallen back again (-0.5%) in the face of the PPI due to Powell’s stoicism.

This has allowed gold to truly look like an inflation hedge, but base metal prices have not responded. Iron ore indeed is unchanged.

Over in the oil field, weekly US inventories did drop last week, but not by as much as expected. And word is that in the wake of last week’s abandoned OPEC negotiations, Saudi Arabia and the UAE may have reached a compromise on production levels. (The UAE was against production increases, and alone in being so.)

On the greenback’s fall the Aussie is back up 0.5% at US$0.7485.

Today

The SPI Overnight closed down -10 points.

China’s preferred June quarter GDP result is out today, along with monthly industrial production, retail sales and fixed asset investment numbers.

The US will also see industrial production data.

It’s jobs day today locally, but the June result is likely already redundant given July developments.

Woodside Petroleum ((WPL)) and Whitehaven Coal ((WHC)) provide quarterly reports.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ARF	Arena REIT	Downgrade to Equal-weight from Overweight	Morgan Stanley
CBA	CommBank	Downgrade to Underperform from Neutral	Macquarie
GXY	Galaxy Resources	Upgrade to Buy from Accumulate	Ord Minnett
NAB	National Australia Bank	Upgrade to Outperform from Neutral	Macquarie
ORE	Orocobre	Upgrade to Buy from Accumulate	Ord Minnett
PLS	Pilbara Minerals	Upgrade to Hold from Lighten	Ord Minnett
VEA	Viva Energy	Upgrade to Add from Hold	Morgans

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

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