The Overnight Report: Buy The Fact

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World Overnight
SPI Overnight	6622.00	+ 16.00	0.24%
S&P ASX 200	6601.00	– 85.00	– 1.27%
S&P500	3789.99	+ 54.51	1.46%
Nasdaq Comp	11099.15	+ 270.81	2.50%
DJIA	30668.53	+ 303.70	1.00%
S&P500 VIX	29.62	– 3.07	– 9.39%
US 10-year yield	3.40	– 0.09	– 2.53%
USD Index	104.86	– 0.62	– 0.59%
FTSE100	7273.41	+ 85.95	1.20%
DAX30	13485.29	+ 180.90	1.36%

By Greg Peel

Rapid Rates

The ASX200 fell almost -60 points in the first hour yesterday but after Tuesday’s carnage, buyers stepped in to take the index to only down -10 points late morning. Then the Industrial Relations Commission announced a 5.2% increase in the minimum wage from July 1.

While no one would begrudge the lowest paid workers an extra dollar an hour when the necessities of life are beyond affordability, the simple fact is the increase – intended to provide cost of living (ie inflation) relief – is itself inflationary.

The last print on average wage growth was only 2.4%, albeit at end-March. The last print on inflation was 5.1% at the same time but if measured today would be much higher, such that Philip Lowe’s suggestion on the ABC that it could be at 7% by year-end is of little surprise.

The response to the wage decision was a 24 points jump in the Aussie ten-year yield to 4.19%, and 25 in the two-year to 3.28%, although admittedly this was largely in line with US bond moves overnight. Yesterday economists at ANZ Bank backed Lowe’s 7% CPI prediction, while Goldman Sachs is now forecasting 50 points RBA rate hikes in all of July, August and September.

I don’t typically highlight weekly economic data, given its volatility, but yesterday’s weekly consumer confidence number showed a -4.5 fall to 86.4 (100 neutral), which is a level typically seen in economic crises such as the GFC.

Yesterday afternoon the ASX200 tumbled to be down -85 points. The tech sector fell -3.1% despite a small gain in the Nasdaq overnight. Real estate fell -2.9%. Consumer discretionary fell -1.9% despite more money in pockets ahead.

It’s all about interest rates, and most evident yesterday in the counter-effect. Stocks that benefit from higher rates appeared in the top five index winners’ board. Insurers Suncorp ((SUN)) and Insurance Australia Group ((IAG)) rose 3.5% and 3.1%, while Computershare ((CPU)) rose 3.3%.

By contrast, property fund manager Charter Hall Group ((CHC)) fell -7.1%.

Every sector closed in the red. Energy fell -2.4% and materials -1.0% as the threat of Chinese re-lockdowns weighed, noting, nonetheless, that lower commodity prices are disinflationary. Lithium, uranium and gold miners copped it, with Novonix ((NVX)) dropping -13.6% (not a miner per se, but lithium-linked), Chalice Mining ((CHN)) -8.7% and Paladin Energy ((PDN)) -7.3%.

Overnight the Fed has delivered a 75 points hike, and everything that fell solidly this week was bought, and vice versa. The S&P500 rose 1.5%.

Our futures are up a measly 16 points this morning.

Channelling Greenspan

From the moment the US CPI printed 8.6% on Friday night, Wall Street reset its expectations for last night’s Fed rate hike to 75 points from 50. Stocks and bonds fell out of bed. Last night Jay Powell delivered 75 points – the first such hike since 1994 under Alan Greenspan.

In his press conference, Powell suggested July could see 50 points or 75. The Fed is data-dependent.

Everything that fell (rose) in the days leading up to the announcement bounced (fell). The S&P500 rebounded 1.5% and the Nasdaq 2.5%. The US ten-year bond yield fell -19 points to 3.3%. The US dollar index fell -0.6%. Gold rallied US$26/oz.

The Fed is now expecting a 3.4% funds rate by the end of the year and 3.8% in 2023, more in line with market pricing. The new rate is 1.50-1.75%, so there’ll have to be some more big hikes before the year’s out.

And will that send the US economy into recession? The Fed hopes not, but cannot make promises. Wall Street now mostly believes 2023 will see economic contraction, if only briefly. There are still those who expect the Fed to go too far, sending the economy into recession, and thus forcing a rate cut.

The bottom line is nobody knows – it will come down to inflation. Jay Powell continues to target 2%. Wall Street’s response is “tell ‘im he’s dreamin”.

US retail sales in May fell -0.3%, according to last night’s release, when -0.1% was forecast. It’s the first fall since end-2021. The US economy is driven by the consumer. Lower demand for goods is disinflationary, and this is what the Fed wants to see. The only problem is everyone bought their goods in 2020-21, and have now switched their attention to services.

Last night the CEO of a cruise company said demand was so strong they would keep on raising prices.

So we’ve had a reflex bounce, but can it be maintained? Most on Wall Street think not. It is notable that while Wall Street did indeed bounce last night, the Dow was up over 600 points in the last hour before closing up 300.

Tonight will be a tell-tale, given smarter investors let markets run wild in the hour and a half after a Fed decision and make their move the next day.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1834.50	+ 26.00	1.44%
Silver (oz)	21.67	+ 0.65	3.09%
Copper (lb)	4.20	– 0.00	– 0.08%
Aluminium (lb)	1.27	+ 0.01	0.95%
Lead (lb)	0.94	– 0.00	– 0.01%
Nickel (lb)	11.78	+ 0.21	1.84%
Zinc (lb)	1.67	+ 0.04	2.16%
West Texas Crude	115.31	– 3.62	– 3.04%
Brent Crude	118.92	– 2.17	– 1.79%
Iron Ore (t)	135.74	– 2.52	– 1.82%

Note that the LME is closing just as a Fed decision is released.

The iron ore market was well closed.

Oil price falls last night are attributed to higher than expected weekly US crude inventories, and the impact on demand from a 75 points rate hike.

Lower US bond yields halted gold’s fall.

The Aussie has rebounded 1.9% to US$0.7008 on the greenback’s fall.

Today

The SPI Overnight closed up 16 points or 0.2%.

Locally we’ll see May jobs numbers today.

New Zealand reports March quarter GDP.

The Bank of England meets. Note that the ECB held an emergency meeting last night and announced moves to counter tightening European credit spreads, sending bond yields tumbling in the smaller EU economies.

Genworth Mortgage Australia ((GMA)) hosts an investor day and Piedmont Lithium ((PLL)) holds its AGM.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CPU	Computershare	Upgrade to Accumulate from Hold	Ord Minnett
EDV	Endeavour Group	Upgrade to Outperform from Neutral	Macquarie
HVN	Harvey Norman	Downgrade to Neutral from Outperform	Macquarie
JBH	JB Hi-Fi	Downgrade to Underperform from Outperform	Macquarie
WES	Wesfarmers	Downgrade to Underperform from Neutral	Macquarie

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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