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The Overnight(s) Report: Wall Street Faith

Daily Market Reports | Jan 27 2023

This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS

World Overnight
SPI Overnight 7463.00 + 31.00 0.42%
S&P ASX 200 7468.30 – 22.10 – 0.30%
S&P500 4060.43 + 44.21 1.10%
Nasdaq Comp 11512.41 + 199.06 1.76%
DJIA 33949.41 + 205.57 0.61%
S&P500 VIX 18.73 – 0.35 – 1.83%
US 10-year yield 3.49 + 0.03 0.90%
USD Index 101.83 + 0.17 0.17%
FTSE100 7761.11 + 16.24 0.21%
DAX30 15132.85 + 51.21 0.34%

By Greg Peel

Wednesday

The ASX200 was up a cautious 10 points on Wednesday morning, following a flat night on Wall Street, ahead of the 11.30am release of the December quarter CPI data. Two minutes after the release, the index was down -30 points.

You’ve got to be quick to get in ahead of those computers but just after midday the index bottomed out down -37, before grafting all the way back to square by mid-afternoon.

The headline CPI showed a quarter-on-quarter increase of 1.9% to 7.8% annual, up from 7.3% in the September quarter. Forecasts were for 1.6% and 7.6%. The trimmed mean (core) rose by 1.7% to 6.9%, up from 6.1%. The market had expected only 6.5%.

That’s a big jump. And do you know what it was all about? Fun.

After two prior years of Christmas/summer lockdowns, restrictions and closed borders, Australia partied. The recreation segment rose 5.4% quarter on quarter – smashing the previous record by a margin.

At the headline level, despite data suggesting the average price of food sold at supermarkets increased even more in the December quarter than the September quarter, food fell -0.9% quarter on quarter. Vegetables fell more than -10% qoq, as the impact of all the rain eased.

The results cement a 25 point RBA rate hike next week, but one was always expected. Certainly there won’t be a pause. There was talk in some circles of a pause in March, but that now looks unlikely.

The stock market did not exactly panic, however. We recall that on Tuesday, data within the NAB business conditions index pointed to weakening inflation, sending the interest rate-sensitive sectors of technology, real estate, utilities and consumer discretionary on a bit of a run.

On Wednesday technology duly fell back -1.2% to wipe out Tuesday gains, but real estate’s -0.6% fall was not as severe, and utilities (+0.5%) and discretionary (+0.4%) remained positive. The banks (+0.3%) regained Tuesday’s fall.

The ease-off to a -22 point loss for the index by the close was mainly due to non-interest rate-sensitive sectors. Energy fell -1.2% on lower oil prices, materials dropped -0.7% on some weak quarterly production numbers from gold miners, and healthcare fell -0.5%.

The top three ASX200 losers were all gold miners. On the winners’ side, discretionary’s gain was aided by a 6.2% pop for News Corp ((NWS)) on news it will not be re-merging with Fox.

So why did the stock market not bottle on the CPI numbers, and for that matter the ten-year yield rise only 6 points to the same 3.50% it’s been hanging around for ages (albeit the two-year did jump 12 points)? I’d say it’s a case of looking ahead in a bad-new- is-good fashion.

The RBA will hike next week, and likely again in March, but while the month of January may still have seen a continuation of the post-covid party theme, by next month it will be all over and the hangover will begin.

That’s my assumption anyway, and I’m not alone. Now three years of steam has been blown off, and cash amassed over three years with nothing to spend it on now somewhat tapped out, it’s time to batten down the hatches.

2023 will be a year of austerity. Spending will come down, and inflation will come down. The RBA will pause soon enough, and maybe even cut in the second half.

The SPI Overnight closed up 17 points on Thursday morning.

Wednesday Night

The most interesting news to hit Wall Street on Wednesday night came from north of the border. The Bank of Canada raised its cash rate by 25 points, but signalled that will be all for now. The BoC wants to pause to allow the impact of the unprecedented pace of hikes to date to be assessed.

The BoC has been ahead of the Fed all the way. It made its first rate hike ahead of the Fed, it moved to 75 point hikes ahead of the Fed, it dropped back to 50 points ahead of the Fed, and it has now dropped back to 25 points, which is also what is anticipated from the Fed next week. Now the BoC has paused, which the Fed has no immediate intention of doing.

Yet.

Despite the news, Wall Street fell into a hole from the open on Wednesday night on the back of corporate earnings results.

Having reported a beat on earnings in the aftermarket on Tuesday night, and run up 4%, Microsoft (Dow) subsequently issued weak guidance and tanked in early trade on Wednesday night. Boeing (Dow) reported a miss on the top and bottom lines on Wednesday night and also went into a tailspin. The Dow fell -460 points from the open and the Nasdaq dropped -2.3%.

Wall Street then spent the rest of the session grafting all the way back. The Dow closed up 9 points, the Nasdaq lost only -0.2%, and the S&P500 remained tenuously above 4000, at 4016, still unable to penetrate the one-year downtrend line. Microsoft and Boeing both closed roughly square.

Earnings results to date (and it's early days) have been so-so but not as bad as feared. Tesla reported a beat on earnings in Tuesday night’s aftermarket, balanced by a miss on margins, and initially rose 2%. Recent trading suggests any weakness on poor results is offering a buying opportunity for the strong of heart.

The capacity for the S&P to breach the downtrend line, or fall back again, will come down not just to earnings but to the December quarter GDP results, December PCE data and next week’s Fed decision.

Commodities

Once again nothing to write home about – small moves only in all commodities on Wednesday night.

The Aussie nevertheless ran up 0.8% to US$0.7105 in the wake of the CPI and a -0.3% drop for the US dollar.

Thursday Night

At Tesla’s subsequent conference call, Musk revealed new orders are running at twice the level of production. Tesla closed up 11% last night.

The first estimate of December quarter GDP had the US economy growing at an annual rate of 2.9%, down from 3.2% in the September quarter, and following two small negatives in the prior two quarters (which no one called “recession”). The solid result might, at a time the Fed is still keen to raise rates, be seen as good news that’s bad.

But no.

January has seen Wall Street backing the soft landing scenario, underpinned by a strong labour market and resilient consumer spending, as well as falling inflation, suggesting the US may avoid recession after all. Which is, of course, good news.

Consumer spending grew at an annual rate of 2.1% in the quarter, just down from 2.3% in September.

But the bears are not convinced. Firstly, a solid GDP result will only steel the Fed’s resolve to keep pushing rates higher. Secondly, 1.5% of that 2.9% represented inventory growth.

We recall that 2022 was the year US retailers were caught out with too much inventory – mostly the types of goods that were loaded up on in 2021 and no longer in demand as consumers turned to spending on “experience”. Target (US) was particularly burned. Increased inventories can be positive if there is a solid market for the products, but negative if there is not.

The jury’s out on just how strong the US consumer can continue to be in 2023. Economists are not expecting a repeat of 2.9% growth in the March quarter, and foresee negative numbers from mid-year, reiterating the well-documented fact it can take up to eighteen months for the impact of Fed rate hikes to be evident.

Yet the labour market continues to confound. Weekly new jobless claims rose by 6000 last week to 186,000 – the lowest level since April.

Back to the stock market, and having reported on Wednesday night’s aftermarket, IBM (Dow) reported record revenues and a planned -3900 staff lay-offs and fell -4.5%.

Chevron (Dow) has riled the White House in announcing a US$75bn share buyback and increased dividend, at a time the average American is struggling with fuel costs, and when the company promised investment in new production.

Defenders note Chevron is investing in new production, spending some US$14bn, but is struggling with shortages in labour and new rig equipment. And (akin to banks in Australia which everyone owns through their super), everybody owns Chevron. Everybody is a shareholder.

Chevron rose 5% and floated all energy boats, driving the sector to outperformance.

Intel (Dow) has reported a big miss this morning in both quarterly earnings and guidance, and is currently down -7%.

Hasbro posted a miss last night, and joined the chorus in announcing it was toying with -15% staff layoffs, and fell -7%.

Nevertheless, at a close of 4060 the S&P500 has broken up through the downtrend line, which is a technically bullish sign. It has however done so a couple of times in the last couple of months, without being able to sustain the break.

US December PCE inflation tonight.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz) 1930.50 – 15.10 – 0.78%
Silver (oz) 23.91 + 0.02 0.08%
Copper (lb) 4.20 – 0.00 – 0.04%
Aluminium (lb) 1.29 – 0.01 – 0.46%
Lead (lb) 0.98 + 0.01 0.56%
Nickel (lb) 13.15 + 0.29 2.25%
Zinc (lb) 1.57 + 0.02 1.47%
West Texas Crude 81.18 + 0.66 0.82%
Brent Crude 87.58 + 1.18 1.37%
Iron Ore (t) 122.49 + 0.56 0.46%

The standout here is a -US$15/oz fall for high-flying gold, on the strength of the GDP result.

The US ten-year yield was nonetheless only slightly higher, up 3 points to 3.49%, and the US dollar index rose only 0.2%, which underscores a feeling that that was then and this is now.

The Aussie is up a little more at US$0.7115.

Today

The SPI Overnight closed up 31 points or 0.4%, making a total of 48 points or 0.6% from the ASX close on Wednesday.

In the wake of the CPI, we’ll see the December quarter PPI numbers today.

It’s the final day of the Chinese New Year break.

Along with PCE inflation, the US will see pending home sales and consumer sentiment.

Champion Iron ((CIA)) and ResMed ((RMD)) will report quarterly earnings.

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ANN Ansell Downgrade to Neutral from Outperform Macquarie
AX1 Accent Group Downgrade to Equal-weight from Overweight Morgan Stanley
Downgrade to Hold from Add Morgans
BEN Bendigo & Adelaide Bank Downgrade to Neutral from Buy UBS
EVN Evolution Mining Downgrade to Hold from Accumulate Ord Minnett
FCL Fineos Corp Downgrade to Accumulate from Buy Ord Minnett
HVN Harvey Norman Downgrade to Neutral from Buy Citi
KMD KMD Brands Downgrade to Equal-weight from Overweight Morgan Stanley
MCR Mincor Resources Downgrade to Neutral from Outperform Macquarie
MFG Magellan Financial Upgrade to Accumulate from Lighten Ord Minnett
MIN Mineral Resources Upgrade to Buy from Neutral UBS
PLS Pilbara Minerals Upgrade to Neutral from Sell UBS
PMV Premier Investments Upgrade to Overweight from Equal-weight Morgan Stanley
TLS Telstra Group Upgrade to Outperform from Neutral Macquarie
WHC Whitehaven Coal Downgrade to Neutral from Buy UBS

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

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