The Overnight Report: Got The Quaddie

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Party like it’s 2023

“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. This will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

“The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2½ per cent at the end of 2023 and for only a gradual increase in wages growth.”

Yesterday’s RBA statement was released after the ASX200 had bottomed out down -59 points at lunchtime and it managed to quickly reduce that loss to -17, but not for long. There was more for the market to consider than the central bank moving its effective first rate hike assumption from “not before 2024” to “end of 2023”.

From the perspective of 2021, this was hardly a very elegant change in policy, with the market still pricing in the first hike later next year. The RBA also abandoned its 0.10% target yield for the April 2024 bond, given “the improvement in the economy and the earlier than expected progress towards the inflation target”.

This was no shock either, given the RBA had not defended the target since last week’s CPI data sent short-end rates surging. The extent that the bond market was surprised is evident in the two-year yield benchmark closing unchanged at 0.65%, and the ten-year down -2 points to 1.88%.

In isolation the statement was positive for the stock market, implying the stimulus will continue to flow for some time yet, but it was the wrong day, with the morning’s falls driven by both the resource sectors and the banks.

Materials fell -2.2% and energy -1.1%. For the former, the iron ore price has again dropped through US$100/t. For the latter, the thermal coal price remains in freefall, prompting BHP Group ((BHP)) to reconsider the timing of its plans to offload its thermal coal assets.

Whitehaven Coal ((WHC)) fell -9.5% to be the worst index performer on the day.

Following on from Monday’s post-result -7.4% plunge, Westpac ((WBC)) fell another -2.7% and the bank sector -1.3%. It could have been worse – investors had moved into Commonwealth Bank ((CBA)) on Monday, but yesterday the stock was down -1.1% at its nadir before the RBA saved to day to some extent, leading to a close of down -0.5%.

Funny thing. If CBA was a US bank it would have dropped on the RBA’s implication of rates not moving higher for two more years. But US bank dividends are insignificant compared to Australia bank dividends, and higher yields undermine dividends.

It was left to Goodman Group ((GMG)) to provide some support, rising 5.6% on a guidance upgrade to win the day, with the property sector closing up 1.2%.

The consumer sectors also put up a fight but as we look ahead to today, the futures are up a full 71 points this morning, or 1.0% to the S&P500’s 0.4%. Either someone with a hangover has pushed the wrong button, or we could expect a big buy order to hit the market this morning.

Wild Rides

The S&P500 once again closed at a new all-time high, as did the Nasdaq and Dow, and also the Russell2000 small cap for the first time March, to mark a rare quadruple. All this ahead of a critical Fed meeting.

Earnings nevertheless continue to fire up Wall Street, with the earnings beat percentage still running above 80% with two-thirds of the S&P now reported. Revenue beats have not quite kept pace, unlike the prior quarter, which has been put down to the supply/labour shortage issue.

But overall the fact more than 80% have beaten on earnings suggests fears of margin contraction were overblown when analysts were cutting their forecasts going into the season. CEO conference calls post results suggest there is some easing of shortages, but it will still be an issue well into next year.

To wit, Apple had previously announced it would cut production of its new iPhone 13 due to the chip shortage. Last night it announced it would cut production of its iPads in order to direct chips to the iPhone 13 to meet demand.

The market was all a twitter over Tesla last night. We recall the stock popped on the announced 100,000 EV order from Hertz, and rose about 30% in a week, but when Elon tweeted the deal had not yet been signed, tweets poured back asking whether the cars would be sold at a discount to secure the deal. It was Hertz who came back and said the deal is definitely on, and not at a discount.

Tesla fell -3%, which is hardly material.

We might also recall that Hertz actually went into administration last year when car rental demand went to zero, but has since recovered. Rival Avis Budget had found itself heavily shorted going into this reporting season, until it released its earnings result last night.

The stock closed up 100%, but not before being up 200% earlier.

In another sign that analysts are having difficulty nailing down pandemic impacts, online education company Chegg fell -50% on its result.

Chegg provides community college courses mostly for “mature age” students (average 25yo) but was itself shocked by a big drop in enrolments as America came “back to school” after the summer. The reason, the CEO suggested, is that rising wages for lower-paid workers are tempting those otherwise looking to improve their education to get a job instead.

We live in interesting times.

They will perhaps be more interesting after tonight’s Fed statement release and press conference. Will Powell do a Lowe? Bring his 2024 assumption forward to late 2023 despite the market pricing in 2022?

Commodities

Not a complete tale of woe but nothing overnight will spur a resource stock rebound today, which makes that 71 points futures gain more out of whack.

Clearly falling commodity prices have impacted on the Aussie, which is down a full -1.2% at US$0.7433. In isolation, a bring-forward of the RBA’s first rate hike forecast should be positive for the currency, unless, as is more likely, forex traders were braced for something more hawkish.

Today

The SPI Overnight closed up 71 points or 1.0%.

Ahead of the Fed release tonight the US will see numbers for factory orders and October private sector jobs.

It is services PMI day across the globe.

Japan is closed today.

Locally we’ll see September building approvals.

Amcor ((AMC)) reports quarterly earnings today, Link Administration ((LNK)) holds an investor briefing, and today’s list of AGMs includes those of Domino’s Pizza ((DMP)) and Worley ((WOR)).

The Australian share market over the past thirty days…

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