The Overnight Report: Fed Confusion

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By Greg Peel

Ill Health

The ASX200 opened lower yesterday despite the futures suggesting up 12 after CSL ((CSL)), and to a lesser extent Cochlear ((COH)), were slammed on their earnings reports. CSL was down over -5% early on and the healthcare sector was staring down a -4% loss.

But the buy-the-dip mentality permeated from Wall Street and from late morning the index rose at a steady pace to the close, again holding above 7100. CSL and Cochlear both closed down -1.3% and the healthcare sector settled at down -0.8% — still the worst performer on the day.

The news of the day, outside of earnings reports, was the release of the June quarter wage price index. It showed wages rose 0.7% in the quarter to a rather anaemic 2.6% year on year – only a slight tick up from the March quarter’s 2.4% — and in the face of 6.1% inflation.

It seems at odds with historically low unemployment (July numbers out today) but as far as the market was concerned, a sign that maybe the RBA won’t hike by another 50 points next month. We recall from yesterday’s RBA minutes the RBA sees wage growth as more of an inflationary driver at present than prices.

So, maybe 40 points, to get back on a 0.25 increment track, or even just 25?

ANZ Bank economists, for one, don’t think so, citing the RBA’s business liaison program suggesting businesses are planning 3%-plus wage rises at year-end. ANZ is sticking with 50.

Given the strongest performing sectors yesterday were staples (+1.7%), discretionary (+1.4%) and their landlords (+1.3%), it seems the market is less hawkish. The Aussie has also plunged -1.2% on only a slight gain for the US dollar.

(The RBNZ hiked 50 points for the fourth time yesterday to 3.00%.)

Back to earnings. Another strong sector yesterday was industrials (+1.0%), thanks to the likes of Brambles ((BXB)), which rose 5.1% on its report, and it’s not often you see a couple of plumbing suppliers in the index top five – Reece ((REH)) rose 3.5% and Reliance Worldwide ((RWC)) 3.3% despite not reporting.

Having been slapped -10% yesterday, Challenger ((CGF)) reversed to gain 5.6% and topped the winners board.

Earnings report losers yesterday included Downer EDI ((DOW)), down -5.2% and Domain Group ((DHG)), down -4.2%.

The banks closed dead flat, which means they actually rose against Commonwealth Bank ((CBA)) going ex-div.

Buy-the-dip lost a bit of support late in Wall Street’s session last night, but our futures are down only -0.2% this morning to the S&P500’s -0.7%. Today will be the biggest to date in the earnings season.

Not So Fast

The mood on Wall Street swung from exuberance to slight nervousness on Tuesday night when the S&P500 hit its 200-day moving average and then dropped hard – an historically consistent response. Some late buying ensued, but last night the Dow dropped -320 points through the morning.

Probably not helping were July retail sales data, which showed sales unchanged from June. If we remove the impacts of lower fuel prices in the month and weak new vehicle sales (supply issues), sales actually rose 0.7%.

The buyers came back late morning. The question remains, nevertheless, as to how much of 0.7% growth can be attributed to higher prices, rather than volume growth (if any).

In the early afternoon the minutes of the last Fed meeting were released. “Many” Fed officials said they were worried about the risk that the Fed could tighten the stance of monetary policy by more than was necessary, the minutes said.

Ah ha! They’re wavering. Surely that means a 50 point rate rise next month rather than 75?

The Dow came back to the flatline.

But…FOMC members were also worried about the “significant risk” that elevated inflation could become entrenched if the public began to question the Fed’s resolve to hike rates by a sufficient amount to rein in inflation.

In came the sellers once more.

Once again we note August jobs and inflation data will be released ahead of the September Fed meeting, which will more likely be the determinant between 50 and 75.

On the subject of retail sales, Target (US) managed to miss earnings forecasts by a wide margin despite having twice downgraded expectations recently. Revenues actually beat, but the retailer had warned it was stuck with too much stay-at-home inventory at the wrong time, and has had to heavily mark down prices to clear it.

Yet Target only fell -2.7% (having fallen -25% on the initial profit warning) as the market gave the retailer the benefit of the doubt that guidance had been reset and the worst was now over.

On the other hand Lowe’s, which we recall once fatally combined with Woolworths to take on Bunnings, did okay and rose 0.6%.

Not all exuberance has been lost. Bed, Bath & Beyond rose another 27%.

Commodities

After two days of sharp falls, one on weak Chinese data and the other on news the Iran nuclear deal is back on the table, WTI crude bounced last night on the weekly US inventory data, which showed a drop.

Seems higher fuel prices have not undermined the traditional US summer driving season, and prices have been coming down anyway.

The wage price index, and hopes the RBA may not go the full 50 next month, have the Aussie down -1.2% at US$0.6941.

Today

The SPI Overnight closed down -13 points.

Our July jobs numbers are out today.

The list of earnings reporters is longer today, and includes ASX ((ASX)), Evolution Mining ((EVN)), Origin Energy ((ORG)) and Transurban ((TCL)).

Incidentally, Qantas Airways ((QAN)) did not report yesterday.

There are also some ex-divs today, including GPT Group ((GPT)), Insurance Australian Group ((IAG)) and QBE Insurance ((QBE)).

FNArena’s Corporate Results Monitor provides both a calendar of upcoming result releases and a summary of all reports to date; https://www.fnarena.com/index.php/reporting_season/

The Australian share market over the past thirty days…

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

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