The Overnight Report: Sell The Fact

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World Overnight
SPI Overnight	6325.00	– 135.00	– 2.09%
S&P ASX 200	6591.10	– 9.90	– 0.15%
S&P500	3666.77	– 123.22	– 3.25%
Nasdaq Comp	10646.10	– 453.06	– 4.08%
DJIA	29927.07	– 741.46	– 2.42%
S&P500 VIX	32.95	+ 3.33	11.24%
US 10-year yield	3.31	– 0.09	– 2.59%
USD Index	103.82	– 1.04	– 0.99%
FTSE100	7044.98	– 228.43	– 3.14%
DAX30	13038.49	– 446.80	– 3.31%

By Greg Peel

Good News Bad

The “buy the fact” relief rally that had Wall Street bouncing following the Fed’s 75 points rate hike flowed through to the local market yesterday, sending the ASX200 up 70 points in the first hour. Then the jobs report came out.

Australia added 61,000 new jobs in May when 25,000 were predicted. The unemployment rate remained steady at 3.9%, but only because the participation rate hit an all-time high 66.7%. The underemployment rate (those who’d like more hours) fell to 5.7% from 6.1% in April, and if you add unemployment and underemployment together you get an “underutilisation rate” of 9.6%, which is the lowest since 1982.

Fabulous stuff, if you’re worried about a local recession. But the data also rather cement expectations the RBA will hike by another 50 points next month, and perhaps in August as well. I haven’t heard a 75 call yet, but give it time.

The problem for the RBA is that we only get inflation data once a quarter, not once a month like grown-up economies. March’s 5.1% CPI is so far in the past it has cobwebs.

The ASX200 gave up most of its gains post the release and then a subsequent attempt to bounce was killed off by US stock futures sliding in the US aftermarket. And then they slid a lot further.

Energy was one of four sectors to close in the green yesterday (+0.5%), despite a dip in oil prices. Oil prices rebounded last night but the energy sector was the worst performer on the S&P500 in falling over -5%. So look out.

Real estate bounced 1.2% after a very torrid period, as the Aussie ten-year yield retreated -16 points to 4.04% in line with US yields, despite the jobs numbers. Goodman Group ((GMG)) led the way with a 2.4% gain.

Materials rose 0.4% and telcos 0.5% but otherwise it was a bad day for defensives, with staples falling -1.0%, industrials -1.2% and utilities -1.6%. No doubt you’ve been following the plight of electricity retailers this week. Within staples, Inghams Group ((ING)) fell -4.4% and Bega Cheese ((BGA)) -3.7%.

Worst individual performer on the day was Link Administration ((LNK)), which fell -10.4% after the ACCC suggested there might be competition issues with the takeover proposal.

Best performer was Eagers Automotive ((APE)), which rose 5.4% after announcing a 10% share buyback.

All a bit academic – our futures are down -135 points this morning.

Pricing in a Recession

I noted yesterday that as always, one must wait for the day after a Fed meeting to judge Wall Street’s true response, rather than the typically wild ride on the day. On Wednesday night the Dow closed up 300 and last night it fell -700, so there’s your answer.

Wall Street is now pricing in a recession. The Fed has now finally come to the inflation party – and has no choice – but it’s arrived far too late. The Fed should have been hiking on the strong economic rebound out of covid lockdowns as inflation was rising and not now, when the economy is clearly slowing. Wednesday night’s weak US retail sales data and record-low consumer confidence are but one sign.

One need look no further for signs of recession-pricing than last night’s aforementioned plunge in US energy stocks. The WTI crude price rose 2% and the S&P energy sector fell -5.6%. Typically the two are in lockstep, but not when a slowing economy meets unaffordable prices – there follows demand destruction.

Consumer discretionary was the next worst performer in falling -4.8%. That sector is now back to where it was pre-pandemic. The S&P500 is now down -25%, wiping out all of 2021.

If it wasn’t enough that the Fed hiked 75 points, last night the Bank of England implemented its fifth consecutive 25 points hike to 1.25%. But the real shock came from the Swiss National Bank. It hiked 50 points – its first hike of any quantum since 2007.

The US dollar index is subsequently down -1.0%, which is a modicum of relief for US multinationals, but a rush of rate hikes across the globe only strengthens expectations of a global recession. Likely worst off is Europe. On Wednesday night the ECB held an emergency meeting to initiate moves to cap surging EU credit spreads.

Yesterday New Zealand’s March quarter GDP came in at -0.2%, when the RBNZ had forecast +0.7%.

The Bank of Japan meets today.

In US economic news, housing starts fell -14.4% in May, far more than forecast, to the lowest level since April 2020. The Philadelphia Fed activity index has slipped into contraction for the first time since May 2020.

Many believe the US is already in a recession, not bowing to the technical “definition” of two quarters of negative growth.

Debate remains as to whether going so hard, so fast and so late, the Fed will eventually have to cut rates, once it sees what it has done.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1857.80	+ 23.30	1.27%
Silver (oz)	21.93	+ 0.26	1.20%
Copper (lb)	4.15	– 0.06	– 1.31%
Aluminium (lb)	1.25	– 0.02	– 1.83%
Lead (lb)	0.93	– 0.01	– 1.15%
Nickel (lb)	11.53	– 0.26	– 2.16%
Zinc (lb)	1.64	– 0.03	– 1.73%
West Texas Crude	117.59	+ 2.28	1.98%
Brent Crude	119.06	+ 0.14	0.12%
Iron Ore (t)	135.04	– 0.70	– 0.52%

Chinese lockdowns or not, global recessions are not healthy for commodity prices. The only positive is that lower commodity prices mean lower inflation, but the one that really matters is oil.

On the greenback’s slump, the Aussie is up 0.6% at US$0.7053.

Today

The SPI Overnight closed down -135 points or -2.1%.

The eurozone will see its May inflation number tonight and in the US, industrial production.

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
CWY	Cleanaway Waste Management	Upgrade to Buy from Accumulate	Ord Minnett
EDV	Endeavour Group	Upgrade to Outperform from Neutral	Macquarie
HVN	Harvey Norman	Downgrade to Neutral from Outperform	Macquarie
ING	Inghams Group	Downgrade to Neutral from Outperform	Credit Suisse
JBH	JB Hi-Fi	Downgrade to Underperform from Outperform	Macquarie
KGN	Kogan.com	Downgrade to Sell from Neutral	UBS
PSI	PSC Insurance	Upgrade to Outperform from Neutral	Macquarie
TPW	Temple & Webster	Downgrade to Neutral from Buy	UBS
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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