The Overnight Report: Neither Here Nor There

This story features SIMS LIMITED, and other companies. For more info SHARE ANALYSIS: SGM

By Greg Peel

Paradise Lost

Monday night strength on Wall Street ahead of last night’s US CPI result had the ASX200 shooting up an exuberant 59 points in the first half hour yesterday morning, before the humans took over. There followed an orderly slide back to a close of only up 13.

We could cite one or more of three reasons why the loss of momentum.

US investors may have been brimming with optimism on Monday night but Australian investors were more cautious ahead of the critical US release. The day’s earnings results netted out to the negative. There were mixed messages stemming from the business and consumer confidence surveys released yesterday, with consumers crawling into their caves.

Winning on results were Sims ((SGM)), up 7.1%, and Challenger ((CGF)), up 4.4%, while Ansell ((ANN)) dropped -8.7%, Breville Group ((BRG)) -4.7% and James Hardie ((JHX)) -4.4%.

Outside of the index, SG Fleet ((SGF)) jumped 9.1% and Temple & Webster ((TPW)) crashed -26.9%.

NAB’s business survey for January showed a 5 point jump in the conditions index to a comfortable +18 and a 6 point jump in confidence to +6 – confidence returned.

The numbers showed increases in both labour/wholesale costs and sales/retail prices, suggesting inflation is being passed on to consumers. ANZ Bank economists point out there was a bit of a bounce-back from the December numbers, and still expect a slowdown in business activity as the year progresses.

Westpac’s consumer survey was a different kettle of fish altogether. This was a February survey, conducted post the last RBA rate hike and warning of more to come.

The consumer confidence index fell to 78.5 from 84.3 in January. The only readings ever recorded below that figure were during recessions. Attitude towards major household purchases fell to the fourth lowest level in 48 years (1974 recession).

Clearly consumers had hoped that the RBA would be calling a pause this month, not the opposite. Hopes were dashed. One might expect these data to reflect poorly on the consumer discretionary sector. But no, it actually rose 0.4% yesterday.

And that includes another -13% drop for Star Entertainment ((SGR)), on top of Monday’s -21%. Such a shame.

Technology (+1.3%) and communication services (+1.2%) were the only big movers yesterday, with other sectors trading more modest ups and downs. Energy, industrials and materials closed lower, and all others higher.

We have some rather telling earnings reports due today, including those from Commonwealth Bank ((CBA)), Fortescue Metals ((FMG)) and Wesfarmers ((WES)), for a nice cross-section.

Wall Street was rather confused by the CPI release last night. Our futures are up one point this morning.

Now What?

US inflation cooled again in January, but not by as much as hoped. The headline CPI fell to 6.4% annual from 6.5% in December, well short of 6.2% forecasts. What does Wall Street do with this information?

The Dow rallied 85 points on the open, then fell -420 down by late morning, then rallied back to be down only -50 mid-afternoon, then closed down -150.

In other words, no idea. To the extent that the S&P500 closed flat.

The more pertinent core CPI fell to 5.6% from 5.7%, when 5.5% was forecast. The stock market might have been thoroughly confused but the bond market wasn’t. The US ten-year yield rose 3 points to 3.75% and the two-year – a proxy for the Fed funds rate – rose 9 points to 4.64%.

Don’t fight the Fed.

As Jerome Powell warned recently, there are clear signs of disinflation but mostly in goods. The more “sticky” segments of rents, services and wages are not going to subside in a hurry.

The fall in US headline inflation from over 9% into the 6s has been fairly swift, but the next drop to 3% may be a long haul. “I think there is going to be a lot more inertia, a lot more persistence that maybe we don’t want,” said the Richmond Fed president last night.

Wall Street can now prepare to be confused again tonight, with the release of January retail sales numbers.

Commodities

A bit of life back in base metals but no apparent response to the CPI data. Gold looks like a stunned rabbit as well.

The Aussie is up 0.3% at US$0.6986.

Today

The SPI Overnight closed up one point.

Along with retail sales, the US will see numbers for industrial production, housing market sentiment and the Empire State activity index tonight.

With Wall Street providing no lead, local investors will be unburdened today in assessing results from CBA, Fortescue and Wesfarmers, along with Cochlear ((COH)), Computershare ((CPU)), Treasury Wine Estates ((TWE)), Vicinity Centres ((VCX)) and others.

For a calendar of earnings result releases and a summary of earnings results to date, refer to FNArena's Corporate Results Monitor (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.

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.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts on the website and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms