The Overnight Report: And Now, The End Is Near

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World Overnight
SPI Overnight	7464.00	+ 23.00	0.31%
S&P ASX 200	7501.70	+ 25.00	0.33%
S&P500	4119.21	+ 42.61	1.05%
Nasdaq Comp	11816.32	+ 231.77	2.00%
DJIA	34092.96	+ 6.92	0.02%
S&P500 VIX	17.87	– 1.53	– 7.89%
US 10-year yield	3.40	– 0.13	– 3.74%
USD Index	101.09	– 1.01	– 0.99%
FTSE100	7761.11	– 10.59	– 0.14%
DAX30	15180.74	+ 52.47	0.35%

By Greg Peel

Pivot Point

Wall Street finished the month on a note of exuberance ahead of the Fed meeting and which carried onto the ASX yesterday morning, sending the ASX200 up 61 points to 7537 – a clear breach of the 7500 resistance level.

It then spent the rest of the session slowly drifting back to 7501.

The rise and fall was not dissimilar to that seen on Tuesday, except it were the weak retail sales number that killed the rally stone dead on Tuesday. Yesterday was more a case of taking risk off the table ahead of last night’s Fed decision.

As it has transpired, the S&P500 has closed up 1% post-Fed, and our futures have cleared the way to break up through 7500 once more, up 23.

Energy let the side down yesterday in falling -1.2% on lower oil prices, which were lower still overnight, and on a call from UBS that thermal coal prices have now passed their peak.

Technology lost -0.4%, with Megaport ((MP1)) falling another -3.5% despite broker suggestions Tuesday’s sell-off was overdone.

Utilities were slightly lower and then all other sectors closed in the green, led out by comeback kid real estate (+1.4%), along with materials (+0.7%), industrials (+0.7%), healthcare (+0.6%) and communication services (+0.6%) – the latter despite REA Group ((REA)) falling another -3.3%.

Consumer discretionary was mildly better while staples sat it out after Tuesday’s surge, and the banks appear to have entered the corridor of uncertainty here, stuck between positive and negative monetary policy impacts, and also closed flat.

Analysts continue to warn the banks are set to post solid results in their first halves, and then it’s all over.

Recalling that the financials sector contains more than just banks, Pinnacle Investments ((PNI)) reported earnings yesterday and fell -7.2% to top the index losers’ board.

And with the ASX200 poised, it was over to the Fed…

Release the Doves

The Fed raised its funds rate by 25 points as expected to 4.50-4.75%, which was a step down from the prior 50 points, which was a step down from the earlier run of 75s.

It seems incongruous to suggest Fed chair Jerome Powell’s talk of the need for ongoing rate increases, and that rates are not yet at a sufficiently restrictive stance, could be seen as “dovish”, but that’s how Wall Street saw it. Not initially – initially the Dow was down over -450 points.

That’s computers for you. But as the press conference proceeded, it became clear Powell was signalling an end is nigh. Maybe a couple of more rate hikes. The disinflationary process has started. Acknowledgement of the lag effect of policy tightening, which will now determine the “extent” rather than the “pace” of further increases.

Powell even hinted perhaps the upcoming March FOMC forecast (dot plots) may come in a little lower than December’s.

December’s forecasts had the terminal (peak) rate at at least 5.00-5.25%, if not 5.25-5.50%, implying either two or three more hikes. After last night’s press conference, two may be a better chance than three. 

Whatever the case, Wall Street can see light at the end of the tunnel.

The US ten-year bond yield fell -13 points to 3.40%. After an initial drop, the Nasdaq shot up 2%. At no point did Powell rage against a too-optimistic Wall Street, as had been the case last August at Jackson Hole, despite January’s surge.

At no point did Powell again mention necessary “pain”.

The US labour market is now the primary focal point. Unemployment remains stubbornly low, but is still expected to tick up.

Last night’s ADP private sector data showed 106,000 jobs being added in January, down from 253,000 in December, and well below forecasts of 190,000. The non-farm payrolls report is out tomorrow night.

All those tech sector lay-offs must soon begin to impact, dependent on (a) the gap between lay-off announcement and lay-off execution and (b), whether laid-off workers all rush out and sign up for unemployment benefits.

They might all get jobs at McDonalds.

In other news, the US manufacturing sector contracted further in January, to a PMI of 47.4, down from 48.4.

It is the Fed’s intention to hit a peak rate, whatever it is to be, and then hold there for at least the rest of the year. Wall Street still believes that come later in the year, the Fed will be cutting.

While Powell did not challenge this assumption last night, he did reiterate that it was better to hike too far, allowing room to cut, than to pause too early and let inflation fire up again.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1948.80	+ 21.50	1.12%
Silver (oz)	23.97	+ 0.30	1.27%
Copper (lb)	4.15	+ 0.02	0.52%
Aluminium (lb)	1.28	+ 0.02	1.31%
Lead (lb)	0.97	– 0.01	– 0.99%
Nickel (lb)	13.10	– 0.14	– 1.07%
Zinc (lb)	1.54	– 0.01	– 0.61%
West Texas Crude	76.94	– 2.16	– 2.73%
Brent Crude	83.30	– 1.19	– 1.41%
Iron Ore (t)	123.37	0.00	0.00%

Fed dovishness has the US dollar down a full percent. This is yet to impact on base metals, as the LME closes just as the Fed statement is being released.

Iron ore rarely responds to dollar moves.

Gold does though, and to falling bond yields.

Fed policy was not front and centre for oil markets, with the latest weekly US inventory data showing a greater than expected build, and OPEC-Plus deciding not to make any change to its production quotas.

The Aussie is up 1.3% at US$0.7144 thanks to the greenback.

Today

The SPI Overnight closed up 23 points or 0.3% — a little timid compared to the S&P’s 1%. Can we hold above 7500 today?

Locally we’ll see building approvals data today.

The Bank of England meets tonight, as the UK goes on strike.

Janus Henderson ((JHG)) and Centuria Office REIT ((COF)) report earnings.

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ABC	Adbri	Downgrade to Underperform from Neutral	Credit Suisse
ALG	Ardent Leisure	Downgrade to Lighten	Ord Minnett
BLD	Boral	Upgrade to Outperform from Underperform	Credit Suisse
BPT	Beach Energy	Upgrade to Add from Hold	Morgans
		Downgrade to Underperform from Neutral	Macquarie
CLW	Charter Hall Long WALE REIT	Upgrade to Buy from Accumulate	Ord Minnett
COL	Coles Group	Upgrade to Outperform from Neutral	Credit Suisse
		Downgrade to Sell from Hold	Ord Minnett
FBU	Fletcher Building	Downgrade to Neutral from Outperform	Credit Suisse
FMG	Fortescue Metals	Downgrade to Underperform from Neutral	Credit Suisse
GOR	Gold Road Resources	Downgrade to Accumulate from Buy	Ord Minnett
GWA	GWA Group	Downgrade to Underperform from Neutral	Credit Suisse
LIC	Lifestyle Communities	Downgrade to Hold from Accumulate	Ord Minnett
MYR	Myer	Downgrade to Lighten from Hold	Ord Minnett
NCM	Newcrest Mining	Upgrade to Add from Hold	Morgans
NHF	nib Holdings	Downgrade to Lighten from Accumulate	Ord Minnett
PNI	Pinnacle Investment Management	Downgrade to Sell from Neutral	UBS
TAH	Tabcorp Holdings	Upgrade to Hold from Lighten	Ord Minnett
WOW	Woolworths Group	Upgrade to Outperform from Neutral	Credit Suisse

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

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