The Overnight Report: Great Rate Debate

This story features TECHNOLOGY ONE LIMITED, and other companies. For more info SHARE ANALYSIS: TNE

World Overnight
SPI Overnight	7400.00	+ 7.00	0.09%
S&P ASX 200	7399.40	– 11.20	– 0.15%
S&P500	4701.46	+ 10.76	0.23%
Nasdaq Comp	15845.23	+ 70.09	0.44%
DJIA	35804.38	– 9.42	– 0.03%
S&P500 VIX	18.58	– 0.80	– 4.13%
US 10-year yield	1.65	– 0.02	– 1.32%
USD Index	96.82	+ 0.34	0.35%
FTSE100	7286.32	+ 19.63	0.27%
DAX30	15878.39	– 58.61	– 0.37%

By Greg Peel

Choice Bro

The Kiwis were at it again yesterday, with the RBNZ implementing its third rate rise to take its cash rate to 0.75%, bearing in mind the RBA’s is 0.10%. When the RBNZ made its second hike last month, the ASX200 had a bit of a panic attack.

Which was probably the reason the index dropped -30 points from the open yesterday. It only lasted ten minutes and by lunchtime the index was up 15 before drifting back in the afternoon. Market-on-close orders were to the sell-side, otherwise the index would have closed flat.

Take out the impact of a jump in oil prices overnight and what appeared a bit of a dull session belied a 1.3% gain in the energy sector, spilling over to utilities (+1.0%), which countered smallish falls in every other sector bar healthcare (+0.1%).

Even materials was weak (-0.2%) despite the iron ore price reconquering US$100/t.

We can’t really pin it on the Kiwis this time as there was no trend apparent among sectors that would suggest fear of a sooner rather than later RBA hike. Financials – the biggest fans of rate hikes — fell -0.3%.

And the Aussie ten-year yield fell one point. Arguably the market is already pricing in a rate hike ahead of current RBA expectations, as is the case in the US, where last night such expectations were again elevated. More on that below.

There was nothing much to write home about among the index winners yesterday, with moves more substantial on the losers’ board.

Ratings downgrades from Macquarie and UBS for TechnologyOne ((TNE)) – both on a valuation basis post a solid rally and a strong earnings result on Tuesday – sent that stock down -8.6% to top the losers.

Pinnacle Investment Management ((PNI)) fell -5.6% due to a capital raise.

And after falling -10% on Tuesday on the announced retirement of the founder and CEO, Bapcor ((BAP)) fell another -4.2% yesterday. Implicit high praise for the guy, but I wonder where they mark his share price-based remuneration.

A big data dump in the US overnight ultimately left Wall Street modestly higher last night ahead of Thanksgiving tonight. Our futures are up 7 this morning.

Nowhere to run to

The US September quarter GDP was revised up to 2.1% growth last night from a prior 2.0%.

New weekly jobless claims shocked by falling -71,000 last week to 199,000. Not just the lowest number in the Days of Covid but the lowest since 1969.

This would suggest some light at the end of the tunnel of the labour shortage but as for supply shortages, apparel retailer Gap reported earnings last and highlighted “significant” supply chain constraints. It fell -24%. Nordstrom had the same to report, and fell -29%. All retailers in the fashion/department store space were duly trashed.

The Michigan Uni gauge of consumer sentiment managed to tick up to 67.4 from 66.8 two weeks ago but bearing in mind this is a 100-neutral index, consumers remain very pessimistic, and higher prices are the biggest concern.

Someone has gone as far as to track the average price of a standard Thanksgiving dinner for ten – turkey, mash, pumpkin pie and other trimmings – and found that on average it's up 14% this year from last.

Which is reflected in last night’s personal consumption & expenditure (PCE) measure of inflation, which rose 0.6% to an annual 5.0% in October, up from 4.4% in September.

The core rate, which is the Fed’s primary focus, rose 0.4% to 4.1%, up from 3.7%.

A strong economy, falling unemployment and surging inflation. And Fed cash rate at zero. Surely it cannot be so for much longer?

Wall Street had recovered from early falls before the minutes of the November Fed meeting were released in the afternoon.

As Dow Jones reports, Federal officials expressed greater worries about a big surge in US inflation at the meeting and raised the possibility of ending bond purchases sooner than they planned if high prices persisted. (ie, speeding up the taper).

Most senior officials at the central bank still expect price rises to slow next year, but they also acknowledged “inflation pressures could take longer to subside” than they previously believed due to ongoing labour and supply shortages.

But on Wall Street, there was no tantrum. The ten-year bond yield actually fell -2 basis points to 1.65% and having been crushed in the last couple of sessions, the Nasdaq managed to outperform the S&P500 by the close.

The Fed funds futures market implicitly moved the first Fed rate hike expectation to May next year. As it was previously at June, it is clear Wall Street has been way ahead of the Fed on timing assumptions, not buying the argument that inflation will simply be transitory.

Not only is an early hike priced in, Wall Street is almost begging for it. On the data releases above, a zero rate seems ludicrous.

Yet there is one catch.

New covid cases in the US rose 25% in US overall last week and more than 40% in the new hotspots of Michigan and Minnesota, and 12 other states.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1787.60	– 4.00	– 0.22%
Silver (oz)	23.52	– 0.10	– 0.42%
Copper (lb)	4.43	+ 0.00	0.06%
Aluminium (lb)	1.22	– 0.00	– 0.19%
Lead (lb)	1.04	+ 0.02	1.51%
Nickel (lb)	9.33	+ 0.11	1.14%
Zinc (lb)	1.52	+ 0.02	1.05%
West Texas Crude	78.32	– 0.39	– 0.50%
Brent Crude	82.18	– 0.32	– 0.39%
Iron Ore (t)	103.45	+ 4.00	4.02%

Hooray for iron ore. Not quite US$220/t though.

Nickel and zinc continue to benefit from renewed Chinese steel production.

Not much to report elsewhere.

If you can keep your cash rate steady while all about you are raising theirs, your currency will respond accordingly. The Aussie is down another -0.4% to US$0.7198.

Today

The SPI Overnight closed up 7 points.

US markets are closed tonight.

Locally we’ll see September quarter private sector capex data.

There’s another handful of AGMs today, and Fisher & Paykel Healthcare ((FPH)) reports earnings.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
APA	APA Group	Upgrade to Add from Hold	Morgans
BAP	Bapcor	Downgrade to Hold from Buy	Ord Minnett
NIC	Nickel Mines	Upgrade to Outperform from Neutral	Macquarie
TNE	TechnologyOne	Downgrade to Underperform from Neutral	Macquarie
		Downgrade to Sell from Neutral	UBS

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

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