The Overnight Report: Wake Up Call

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World Overnight
SPI Overnight	7047.00	– 126.00	– 1.76%
S&P ASX 200	7182.70	+ 70.20	0.99%
S&P500	3923.68	– 165.17	– 4.04%
Nasdaq Comp	11418.15	– 566.37	– 4.73%
DJIA	31490.07	– 1164.52	– 3.57%
S&P500 VIX	30.96	+ 4.86	18.62%
US 10-year yield	2.89	– 0.08	– 2.76%
USD Index	103.92	+ 0.62	0.60%
FTSE100	7438.09	– 80.26	– 1.07%
DAX30	14007.76	– 178.18	– 1.26%

By Greg Peel

Brother can you spare a dime?

It’s one of those days for which it seems pointless going into too much detail about yesterday’s trade on the local market, which saw the ASX200 close up 70 points, given Wall Street has tanked overnight and our futures are down -126 points this morning.

But there was one interesting development.

The index had opened up 87 points yesterday on Wall Street’s Tuesday night rally but quickly fell back to be up 50 around the time of the March quarter wage price index release.

To recap, since last year the RBA had been “patiently” awaiting signs of wages growth in Australia before it would raise its cash rate to counter rising inflation, which until the March quarter CPI release was comparatively tame on a global basis. But when the CPI came in at 5.1%, the board lost patience.

It was assumed the RBA would wait for the WPI data before making its move but it didn’t, instead hiking a full 25 points when 15 was anticipated, citing higher than expected inflation and industry feedback that suggested wage growth may have increased to as much as 3%.

It didn’t. March quarter wage growth came in at 2.4% year on year when economists had forecast 2.5%. Add in the CPI for the same period and real wages declined -2.7%.

The RBA had actually considered a 40 point opening hike but settled on 25 instead, leading economists to believe June might bring a 40 point hike if the WPI was “hot”. It wasn’t. So the assumption now is another 25 point hike is upon us, not 40.

In a day of positive sentiment from the open, the market took the news as a positive (less rapid rate hikes) more than a negative (less consumer spending power). Even the consumer discretionary sector rose 1.1%, along with other relieved sectors of communication services (1.5%), industrials (1.8%), tech (1.9%), real estate (1.7%) and utilities (1.0%).

Watch consumer discretionary today, for the same reason I said watch staples yesterday, which closed down -1.0% gainst the trend. More on that below.

Materials was the winning sector on the day, rising 2.5% on commodity price rebounds driven by Shanghai’s pending reopening (and Twiggy returning to the helm). Oil prices went the other way, but energy closed flat.

Also closing flat were the banks, which would have preferred a better wages result.

Anyway, we’re in for a fresh bollocking today, with all S&P500 sectors closing in the red, and all 30 Dow stocks as well.

Off Target

In the wake of more hawkish talk from Jay Powell on Tuesday night, the US ten-year bond yield briefly hit 3% again last night, which is never a good sign for growth stocks. But that is not what specifically spooked Wall Street.

Before the bell, Target (the much more extensive US version) reported earnings, and then fell -25%. It was the company’s worst day since 1987, just as Walmart had suffered a similar fate on Tuesday night.

Management cited the rising costs of goods, freight and wages, but more ominously cited lower consumer demand. Like many retailers, Target had switched from “just in time” inventory management to stockpiling to counter supply chain constraints, but this has come back to bite. On lower demand, those inventories have been written down in value.

The result on Tuesday night from Walmart came as a shock, and the Dow component fell -11%. The same rising costs were to blame. Walmart is predominantly a supermarket chain, selling staple items consumers have to buy, recession or not. Target is classed as discretionary, but as a discount department store offers “staple” elements of other things that have to be bought regardless, such as clothes for growing children.

Walmart’s woes were overlooked on Tuesday night, as Wall Street decided it was time for a rally, even if it proved to be a bear market rally. But put Walmart and Target together, and the canary in the coal mine is saying there’s nowhere to hide. The US consumer had been assumed to be strong. These results suggest otherwise.

As a result, all consumer stocks were carted last night, including staples. Proctor & Gamble (Dow), which supplies the supermarkets with everyday goods, fell -6%, and that is almost unheard of.

Discretionary leader Amazon fell -7%, and has now lost over a third of its value this year. Market bellwether Apple fell -5.6%. Who needs an iPhone 14 so soon?

Suffice to say the sentiment spilt over to IT spending expectations, which meant another drubbing for not-yet-profitable growth stocks, particularly in the cloud.

Otherwise, selling begat selling throughout the session, and while indices did not quite close on their lows, they weren’t far off.

Adding to weak sentiment was the interpretation of Jerome Powell’s talk on Tuesday night. Powell suggested financial markets are where they should be, in other words the Fed is not fussed about a -20% fall for the S&P500. That was taken as a signal to buy on Tuesday night.

Last night it was taken as there no longer being a “Fed put” in place. In past bear markets, the Fed has acted by cutting rates. It can’t cut rates this time – indeed the opposite is true.

Any good news?

Well while the S&P made a new 2022 low last night, that takes it back only to February last year, and thus the index has only lost about half of its gains from the pre-pandemic high. The average PE has fallen to 16x, which is actually less than pre-pandemic. This is only comforting however, if one assumes the E part, being forecast forward earnings, is accurate.

Walmart and Target may already be sparking a rethink.

Note that despite losing a third of its value, Amazon is still trading on 70x.

Meanwhile, having hit 3% early last night, the US ten-year yield closed down -8 points to 2.89%, as investors bailed back into safe haven bonds.

So much for a bear market rally.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1817.00	+ 1.30	0.07%
Silver (oz)	21.38	– 0.27	– 1.25%
Copper (lb)	4.20	– 0.03	– 0.82%
Aluminium (lb)	1.38	– 0.00	– 0.32%
Lead (lb)	0.95	+ 0.00	0.15%
Nickel (lb)	11.83	– 0.12	– 1.02%
Zinc (lb)	1.63	– 0.03	– 1.84%
West Texas Crude	109.59	– 2.81	– 2.50%
Brent Crude	109.18	– 3.47	– 3.08%
Iron Ore (t)	129.92	– 1.66	– 1.26%

A little bit of give-back in metal/mineral prices after a couple of stronger sessions.

Oil prices fell despite weekly US crude and gasoline inventories showing a surprise drop as the US moves towards the summer driving season. If US consumers are cutting back on food and clothing spending, no doubt filling the car for the holidays is in that mix as well.

The wage price index had the Aussie down initially yesterday, but the US dollar is back up 0.6% so the two have the Aussie down -1% at US$0.6957.

Today

The SPI Overnight closed down -126 points or -1.8%.

The government will be hoping there’s some better news in today’s April job report.

It isn’t the best day for Aristocrat Leisure ((ALL)), Nufarm ((NUF)) and Webjet ((WEB)) to report earnings.

Nor for BHP Group ((BHP)), Woodside Petroleum ((WPL)) and Adbri ((ABC)) to hold their AGMs.

And it won’t help that Westpac ((WBC)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
JHX	James Hardie Industries	Upgrade to Overweight from Equal-weight	Morgan Stanley
		Upgrade to Buy from Accumulate	Ord Minnett
OZL	OZ Minerals	Upgrade to Neutral from Underperform	Credit Suisse
PMV	Premier Investments	Upgrade to Buy from Neutral	Citi
WES	Wesfarmers	Downgrade to Sell from Neutral	Citi

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

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

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