The Overnight Report: No Great Shock

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

Indecision

It was reasonable to expect the ASX might see a quieter day ahead of critical data in the US last night but an ultimate -8 point drop belied the down-up-down-up action during the session which saw the ASX200 trade in a 38 point range.

By the close, only two sectors moved by more than 1% — materials fell -1.1% on a big fall in the iron ore price, while property won the day with a 1.6% gain, led by retail REITs. This likely reflects a reopening play, vaccination numbers, the potential for booster shots and jabs for kids, and an international border reopening.

The banks were weak (-0.6%) after Commonwealth Bank ((CBA)) suggested at its AGM it was prepared to go harder on lending restrictions, which was worth -1.6%, while Bank of Queensland’s ((BOQ)) earnings result disappointed and that stock fell -4.3%.

Consumer staples were strong (+0.7%) after Bubs Australia ((BUB)) jumped a full 38% on a trading update which revealed a very strong result in China. Bubs is not in the index, but fellow infant formula stock a2 Milk ((A2M)) is, and it jumped 13.5% in sympathy.

We recall a2 Milk copped a hiding last week when a class action against the company was announced.

Discretionary was also solid (+0.5%), helped by an 8.7% jump for auto parts company GUD Holdings ((GUD)) after it provided an update suggesting it had enough inventory to carry through the supply shortage issue for now. A bounce-back of 6.5% for Star Entertainment ((SGR)) following its -22% plunge also helped.

On the losers’ board it was all about iron ore, other than Band of Queensland sneaking into the top five.

Movements in other sectors bare little mentioning.

So, what will happen today? We saw Wall Street also indecisive last night after another “hot” CPI, with the Dow not even managing to move a full point by the close.

The S&P500 broke its losing streak in rising 0.3% but our futures are up a full 50 points, or 0.7%, this morning. Relief that the US CPI didn’t spark anything untoward, or is a big buying order going to hit the market today?

Base metal prices knocked it out of the park last night although iron ore is down again, but gold has shot up on the CPI so we’ll likely see all gold miners in the top five winners today.

Otherwise, our September jobs numbers are out today.

Feeling Hot, Hot, Hot

The US headline CPI rose 0.4% in September when 0.3% was forecast, sending the annual rate up to 5.4% from 5.3% in August to mark a new 30-year high. The main drivers of growth were energy, food and rent.

The core CPI, which excludes energy and food, rose 0.2% when 0.1% was expected but the annual rate remained unchanged a 4.0%.

It is interesting to note the Fed prefers the core PCE measure of inflation, which also excludes energy and food and furthermore weights house prices and rents at only around half of their weight in the CPI. But given oil prices have doubled this year, gas prices have trebled, and house prices have risen 20% dragging rents along with them, it is hard to see how the Fed can ignore the reality of rising costs on households and businesses.

To that end, the minutes of the last Fed meeting, released last night, showed the FOMC “discussed” kicking off tapering either in November or December, but we knew that. “Several” Fed officials said they preferred to proceed at a more rapid pace, but we knew that too. Others were more worried about a taper tantrum. Should that be an issue?

Wall Street was also fully prepared for another hot inflation number, as most see inflation pressure as remaining “stickier” than Jay Powell expects. President Biden went as far last night to himself announce that the two big ports in the LA area, which handle 40% of US imports, will now run 24/7.

So the reaction to 5.4% was muted. There was a brief drop on Wall Street early but not for long. While stronger inflation should imply higher bond yields, the ten-year yield actually fell -3 points to 1.55%. While stronger inflation should imply a rise in the greenback, it has already run up hard, so it fell -0.5% on what appears a “sell the fact”.

But while the ten-year yield fell -3 points, the two-year yield rose 2 points. This flattening of the yield curve points to a bond market preparing for a Fed rate hike sooner rather than later.

Speaking of sell-the-fact, JP Morgan reported earnings last night, beat on just about every metric, and fell -2.5%. The banks have also run up hard these past months. There were also several one-offs that assisted the "beat".

Current forecasts for S&P500 September quarter earnings growth are at a consensus 27.6%. In any other world, that would be an OMG number. But not when one compares it to a 52.8% gain in the March quarter and 92.4% in the June quarter. And not when one compares to the collapse in earnings in 2020, which provides the low base for these extraordinary 2021 numbers.

More big bank earnings results will follow this week, and next week things really heat up in earnings season.

In close focus will be the FAAMGs. The big cash flow machines led the Nasdaq higher last night with the exception of Apple, which is having to cut iPhone 13 production due to supply shortages.

But with the CPI out for the way, the ten-year yield down rather than up, a lot of the tech winners that have lost their fizz this year, such as Zoom, also caught a bid.

Let’s see what earnings results reveal.

Commodities

European-based zinc producer Nyrstar announced last night it would slash production by -50% due to the soaring cost of electricity. Such a move has implications for other metals, although aluminium has already been running hard for the same reason.

A -0.5% drop in the US dollar would have helped.

Iron ore does its own thing.

It certainly helped gold – lower long bond yields, lower dollar and rising inflation are ambrosia for the yellow metal.

And the Aussie has acted as it might, rising 0.4% to US$0.7383.

Today

The SPI Overnight closed up 50 points or 0.7%. Interesting.

Following on from consumer inflation last night, the US will see wholesale inflation numbers tonight.

China also reports September CPI and PPI data.

Locally we see September jobs.

ARB Corp ((ARB)) and Lovisa Holdings ((LOV)) hold their AGMs, today, meme stock Redbubble ((RBL)) provides a quarterly update, and the Krug will be flowing when Whitehaven Coal ((WHC)) does the same.

Viva Energy ((VEA)) goes ex-dividend.

The Australian share market over the past thirty days…

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