The Overnight Report: Too Far, Too Fast?

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World Overnight
SPI Overnight	7380.00	– 40.00	– 0.54%
S&P ASX 200	7448.70	+ 5.30	0.07%
S&P500	4551.68	– 23.11	– 0.51%
Nasdaq Comp	15235.84	+ 0.12	0.00%
DJIA	35490.69	– 266.19	– 0.74%
S&P500 VIX	16.98	+ 1.00	6.26%
US 10-year yield	1.53	– 0.09	– 5.56%
USD Index	93.88	– 0.05	– 0.05%
FTSE100	7253.27	– 24.35	– 0.33%
DAX30	15705.81	– 51.25	– 0.33%

By Greg Peel

Shocked to the Core

Australia’s headline inflation rose by 0.8% in the September quarter as expected. The annual rate fell to 3.0% from the June quarter’s 12-year high 3.8%. The primary reason for the fall was that last June, the economy was surviving on government handouts, which expired after last year’s lockdown.

The biggest contributors to inflation last quarter were owner-occupier house purchases (+3.3%) and fuel costs (+7.1%).

The surprise, however, was the RBA’s “trimmed mean” or core inflation number. It rose 0.7% for an annual rate of 2.1%, up from 1.8%, to mark the first move into the RBA’s target zone since 2015. The big increase was in “non-tradable” inflation, which includes such items as electricity, water, all public services, hotel accommodation, real estate, construction, local transportation.

The core does not include fuel costs.

In isolation, a drop in headline inflation should be positive on a global comparison basis, and even a trans-Tasman basis, but the move above 2% for the core rate only implies one thing – the first RBA rate hike might be closer than the central bank insists.

The ASX200 opened up 30 points in the first half hour yesterday and at 11.30am was up 24. At 12pm it was down -24. You can probably tell when the CPI data hit.

The Australian two-year bond yield, which the RBA is supposed to be capping at 0.10%, rose 5 points to 0.18%. The five-year, beyond the QE range, jumped 13 basis points to 1.34%. The ten-year ticked up 1 point to 1.80% and the fifteen-year fell -2 points to 2.16%.

The implication here is a near term inflation impact in a slowing economy. The market is now pricing in three RBA rate hikes in 2022, to 0.75%. The RBA is still on nothing until 2024.

[Note that last night the Bank of Canada said it would abruptly end its bond buying program and warned of prolonged inflation through 2023, while also signalling it may hike interest rates sooner than expected, in the second quarter of 2022.]

Rate hikes are good for banks, up 0.5% yesterday. Unusually, consumer staples were the worst performing sector on the day in falling -2.0%, but that was due to a -12.0% plunge for a2 Milk ((A2M)) following an investor day that probably didn’t go as well as planned.

Materials fell -1.1%. Watch out today – commodity prices have had a shocker overnight. Utilities fell -1.2% because AGL Energy ((AGL)) fell -4.0%, likely sliding on the Coalition’s pretend emissions plan.

Supporting the banks to balance the index were healthcare (+1.1%) and telcos (+1.9%), with Telstra ((TLS)) still rising (+3.2%) on the government handing the company a big chunk of taxpayer money.

It’s all academic, as this morning the futures are down -40 points on weakness on Wall Street and, as noted, some big falls among commodity prices.

Losing Faith

I noted yesterday morning that earnings reports after the bell on Wall Street for Microsoft, Google and Twitter, which were all beats for the quarter, garnered no initial response from investors. Instead, they went away and had a closer look at the numbers.

Last night Microsoft (Dow) closed up 4% and Google 5%, while Twitter fell -11%.

Reporting last night before the open, Visa fell -7%, which was worth over -100 Dow points. McDonalds (Dow) went the other way, up 2.7% on its report, and Coke up 1.9%, but the bulk of Dow stocks closed lower, with selling once again accelerating into the close.

Visa blamed the lack of overseas tourism. Many believe BNPL will see off 20% interest credit cards for good.

The most recent move up in US bond yields can be attributed to inflation numbers but now, as in Australia, the opposite is true. Last night, on the Bank of Canada news, the US ten-year yield fell -9 basis points to 1.53%, while the two-year rose one point. Persistent inflation and slowing economic growth, which some are calling “stagflation”, but only because they don’t have another word for it.

“Stagflation” was coined in the seventies when the US, Australia and everyone else was suffering surging inflation (back then uncontrolled by central banks), a deep economic recession (not a slowing from the peak) and rampant unemployment (in 2021 currently falling).

So it’s some sort of “flation”, but observers suggest the reason why Wall Street appears to be rolling over once more is simply because it ran up 7% from September and into earnings season.

Not helping is the shambles that is Biden’s infrastructure ambition. Democrats remain unable to get close to a compromise. That “billionaire’s tax” I spoke of yesterday? As good as binned.

While Microsoft’s rally last night was unable to save the Dow, even Microsoft and Google combined could not prevent the Nasdaq from closing only flat in a session which saw a big drop in long bond yields.

By the close, volumes on the NYSE (reflecting the S&P500, not the Nasdaq), were around 3.5 to one selling to buying. The Big Tech names may have a Big impact on all indices, but otherwise selling is very widespread.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1797.20	+ 2.70	0.15%
Silver (oz)	24.04	– 0.12	– 0.50%
Copper (lb)	4.45	– 0.08	– 1.72%
Aluminium (lb)	1.22	– 0.09	– 6.92%
Lead (lb)	1.10	– 0.02	– 1.66%
Nickel (lb)	8.88	– 0.32	– 3.44%
Zinc (lb)	1.55	– 0.03	– 1.62%
West Texas Crude	82.08	– 2.57	– 3.04%
Brent Crude	84.12	– 2.26	– 2.62%
Iron Ore (t)	119.65	– 3.10	– 2.53%

Beijing’s plan to control thermal coal prices rather than allow a free market to determine prices is working. Thermal coal prices are pulling back hard, reminiscent of iron ore earlier this year.

Aside from actual power cuts, smelters of metals have been cutting production due to the overwhelming cost of power, which in turn was due to the overwhelming cost of coal. Now that the coal price is retreating, smelters can lift their production levels once more, implying increased supply.

The biggest consumer of power in smelting is aluminium.

Weekly US crude inventories showed a rise last week. Add in talk that Iran may come back to the table to talk nuclear deal, and the recent oil price surge, and there was plenty of room for some profit-taking last night.

The Aussie is up 0.2% to US$0.7518 on a balance of higher core inflation and lower commodity prices.

Today

The SPI Overnight closed down -40 points or -0.5%, matching the S&P.

The US will provide a first estimate of September quarter GDP tonight.

Today is the biggest day on the calendar for the local AGM/quarterly report season. Coles ((COL)), Fortescue Metals ((FMG)) and Newcrest Mining (NCM)) are but three on the list.

ANZ Bank ((ANZ)) reports earnings today, as does Australian Pharmaceutical Industries ((API)).

Bank of Queensland ((BOQ)) goes ex-divided.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
CRW	Cashrewards	Downgrade to Accumulate from Buy	Ord Minnett
MQG	Macquarie Group	Upgrade to Neutral from Sell	Citi
ORI	Orica	Upgrade to Overweight from Equal-weight	Morgan Stanley
RWC	Reliance Worldwide	Upgrade to Outperform from Neutral	Macquarie
SGF	SG Fleet	Upgrade to Outperform from Neutral	Macquarie
SGM	Sims	Upgrade to Buy from Neutral	UBS
SIQ	Smartgroup Corp	Upgrade to Outperform from Neutral	Credit Suisse
		Upgrade to Add from Hold	Morgans
SLA	Silk Laser Australia	Downgrade to Accumulate from Buy	Ord Minnett

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

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