The Overnight Report: Inflation, Ho Hum

This story features AGL ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: AGL

The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Two Steps Forward…

For the third day in a row, the ASX200 shot out of the blocks yesterday to a new intraday high by late morning, only to fall sharply back again. In each case, the index has posted a new closing high, but well off the high of the day.

On Monday and Tuesday the turn came smack on 11am, suggesting the daily “Glad Wrap” (thank you SMH letter writer) has been the cause. But if the market is worried about the daily case-count, persistent new closing highs do not suggest so.

So what’s going on? The index peaked at a gain of 53 points yesterday, only to close up 21. Just early exuberance met with more measured sentiment? Or a computer ploy to rev up the market from the open and then take swift profits? The ASX200 has been largely tracking the S&P500 in terms of grafting gains, and our futures are up 10 points this morning.

Beware the early rally.

Energy led gains yesterday with a 1.0% jump on the oil price rebound, spilling over into a 1.9% gain for the (much smaller) utilities sector thanks to AGL Energy ((AGL)).

Materials were not far behind, up 0.9%, as investors shrugged off another big fall in the price of iron ore (albeit a rebound yesterday), and lithium miners had another strong session.

Those moves can be directly tagged to Biden’s infrastructure package taking a step forward, implying increased demand for all construction inputs. Local construction companies such as Cimic Group ((CIM)) and Downer EDI ((DOW)) also did well yesterday, but are buried in the industrials sector along with your toll roads, airlines and airports that are clear delta victims.

Industrials fell -0.5%.

The big news of the day was Commonwealth Bank’s ((CBA)) result, or more so its capital returns, which sparked up the banks yet again (+0.9%) to dominate the index. Investors loved it, but analysts shrugged, noting the numbers were just as expected. Aside from CBA being perennially considered to be overvalued versus peers (a stance that in my recollection has proven correct maybe once or twice in the past couple of decades), the banks have all been rallying strongly for the past few sessions.

Healthcare provided a counter (-0.6%) on the stronger Aussie, while telcos fell -0.8% having risen 0.9% the day before. Technology fell -0.7% as BNPL speculation cools down, and Megaport ((MP1)) disappointed with its result, falling -6.3% to be the day’s worst index performer.

Lithium miner Orocobre ((ORE)) topped the board with another 6.3% gain, in the wake of Phillips 66 taking a stake in Novonix ((NVX)), while the slow movers pushed Novonix (not in the index) up a further 12%.

With the S&P hitting yet another new high last night (46^th this year), the scene is set for the groundhog to see his shadow.

Transitory?

The US CPI for July came in at 5.4% annual growth. Two months ago, such a number would have put the frighteners through Wall Street. Last night, Wall Street lapped it up.

The May result, which was the first to reveal a stunning jump in inflation, took all by surprise being well above forecast. The June result was even higher, but not quite as dramatic a forecast beat. The July number matched June, but was slightly below forecast.

The core CPI was also below forecast at 4.3%, down from 4.5% in June.

Jerome Powell will sleep well tonight.

While the stock market saw a green light, the bond market shrugged, with the US ten-year yield static at 1.34%. Indeed, the ten-year had actually fallen to 1.30% earlier in the day, but that was because of a well oversubscribed auction. US bond yields are currently providing little indication of inflation expectations, because it’s all about foreign buyers from the lands of low/negative rates.

Wall Street also paid little attention to yet another Fedhead lighting the taper. Echoing the view of the Boston Fed president espoused the day before, the Dallas Fed president, Rob Kaplan, suggested the Fed should announce tapering at its September meeting and get going forthwith.

However, the Chicago Fed president, Charles Evans, later declared he would rather see the Fed hold off for longer. Evans is an FOMC voting member. The other two are not.

Aside from inflation relief last night, Wall Street kicked on with the same theme of Tuesday night, cheering on the infrastructure bill that still has a long way to go. Once again industrials, materials and energy led the charge, along with the banks, pushing the Dow to another new high on rotation out of growth stocks, as evident in the Nasdaq’s repeat underperformance.

In other news, you’ll recall I noted this week Moderna shares had rallied 3500% in two years, and this week had become a bit of a meme stock. But when an analyst pointed out last night Moderna’s valuation had gone from unjustified to ridiculous, the stock fell -15%.

It has been a running joke since last year that everyone in lockdown, around the world, has ended up putting on weight. Not so funny for WW, formerly known as Weight Watchers. It fell -25% last night on its earnings report.

Commodities

Base metals are generally holding their infrastructure-driven strength, without fanfare.

Iron has bounced, but it’s an awful long way back, and US$200/t may never be seen again. Unless, perhaps, if the US ramps up imports to produce enough steel for Joe.

The oils, too, are kicking on for Joe, but the snap-back for gold, apart from being unsurprising after such a swift plunge, is more of an inflation play.

Bond yields were steady and the US dollar ticked down for once, taking the Aussie up 0.3% to US$0.7376.

Today

The SPI Overnight closed up 10 points.

The US follows up with the July PPI tonight.

Today’s local earnings reporters include AGL Energy, AMP ((AMP)), Goodman Group ((GMG)), Telstra ((TLS)) and Woodside Petroleum ((WPL)), among many others.

ANZ Bank ((ANZ)) and National Bank ((NAB)) will both provide quarterly updates.

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