The Overnight Report: More Fed Angst

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

World Overnight
SPI Overnight	7434.00	– 21.00	– 0.28%
S&P ASX 200	7490.10	– 37.80	– 0.50%
S&P500	4481.15	– 43.97	– 0.97%
Nasdaq Comp	13888.82	– 315.35	– 2.22%
DJIA	34496.51	– 144.67	– 0.42%
S&P500 VIX	22.10	+ 1.07	5.09%
US 10-year yield	2.61	+ 0.05	2.07%
USD Index	99.64	+ 0.16	0.16%
FTSE100	7587.70	– 26.02	– 0.34%
DAX30	14151.69	– 272.67	– 1.89%

By Greg Peel

The Fed and China

The ASX200 opened -90 points lower to 11am, in a knee-jerk reaction to weakness on Wall Street driven by another step-up in aggressive policy rhetoric from the Fed. But the index then grafted back all day to close down -37.

The clawback came even as it was announced the Shanghai lockdown will continue indefinitely, as China hits a fifth successive day of record new cases. Are the lockdowns having an impact on China’s economy? Independent data from Caixin has China’s composite PMI (manufacturing plus services) down to 43.9 from 50.1, implying rapid contraction.

The extended lockdown was never going to be good news for commodity prices and thus our resource sectors, although energy managed to fall only -0.3% to materials’ -1.5%. The oils are down -5% overnight so it might be different today.

Technology was inevitably down -2.9% after starring on Tuesday, and will also be heading that way today.

Where do you go when you want out of resources and tech? Into the banks of course. Financials rose 0.7% to save the day, with the ten-year yield rising 12 points to 2.97%, not waiting for the RBA to make up its mind on rate hike timing.

The only other sector to close in the green yesterday were staples, because we all have to eat, but only by 0.1%.

Outside of the abovementioned sectors, selling was relatively uniform, although consumer discretionary was again one of the weaker performers (-0.9%).

Discretionary did see some gainers in the form of the heavily shorted Flight Centre ((FLT)) and Corporate Travel Management ((CTD)), up 3.5% and 2.2% in the face of extended Chinese lockdowns, but it appears travel demand is strong after two years of camping trips and despite high fuel costs, and having to fly the long way around Russia.

Whitehaven Coal ((WHC)) topped the index with a 5.5% gain as the EU added coal to its Russian import bans.

The losers’ board was otherwise dominated, again, by previously high-flying miners, with Lynas Rare Earths ((LYC)), Liontown Resources ((LTR)) and Nickel Mines ((NIC)) all falling close to -6%.

The Fed was at it again last night, scaring investors on Wall Street, while commodity price moves overnight have reflected the Chinese lockdowns. The Nasdaq was down another -2.2%.

Our futures are down -21 points this morning, having reacted to some extent to the China news yesterday.

Keeping it on the QT

“It’s hard to know how much the US Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.”

Fortunately these are not the words of a Fed official but of former New York Fed president Bill Dudley, in an interview last night. But they do highlight that the market has switched attention from actual rate rises – no one will be surprised if three 50-pointers come in a row – to balance sheet reduction, or “quantitative tightening”.

The minutes of the March Fed meeting, released early in last night’s session, confirmed members were prepared for 50 point moves, but the surprise came from discussion over QT.

Fed officials want to reduce the balance sheet by -US$95bn per month after a three-month phase-in, potentially starting in May, but have yet to make a final decision. This compares to a market forecast of -US$75-85bn prior, and the -US$50bn rate implemented in the post-GFC tightening phase.

They are prepared to move beyond “passive” tightening – simply letting bonds mature without replacement – and on to “active” tightening, which implies actually selling mortgage-backed securities in the market. Note that MBS are “real”, as the name implies, whereas Treasury bonds on the balance sheet were conjured up in the Fed’s basement laboratory, and hence should not be sold but just allowed to evaporate.

Wall Street got the wobbles on Tuesday night when Fed board governor Lael Brainard suggested exactly what these minutes confirmed. But the Dow managed to turn around from an initial -360 drop to close down -144. It was again the Nasdaq that copped the brunt.

Interestingly, a 6 point gain in the US ten-year yield last night to 2.61% and a slight dip in the two-year took the spread out to around +10 points.

The discussion now is of just how hard the Fed is prepared to go. It is aiming for a “soft landing”, which implies slowing the pace of economic growth, but is it willing to force a “hard landing”, which implies negative growth and potential recession?

Bill Dudley appears to be calling for the latter.

What the Fed has up its sleeve is a 2022 GDP growth forecast that remains above-trend, suggesting its attack on inflation has plenty of run-way before contraction is on the cards.

But not everyone agrees with the Fed forecast.

“Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have caused us to revise down our forecast for global growth significantly. We are now projecting a recession in the U.S. and a growth recession in the euro area within the next two years.”

Deutsche Bank economists last night became the first to stick their necks out.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1925.30	+ 3.30	0.17%
Silver (oz)	24.44	+ 0.17	0.70%
Copper (lb)	4.67	– 0.07	– 1.37%
Aluminium (lb)	1.65	– 0.02	– 1.18%
Lead (lb)	1.10	– 0.00	– 0.19%
Nickel (lb)	15.40	+ 0.10	0.65%
Zinc (lb)	1.98	+ 0.01	0.47%
West Texas Crude	96.23	– 5.73	– 5.62%
Brent Crude	101.74	– 3.96	– 3.75%
Iron Ore (t)	160.07	– 2.20	– 1.36%

The above moves, particularly that of the oils, reflect extended Chinese lockdowns, but perhaps some recession fear is evident as well.

The Aussie has been hit hard, down -0.9% to US$0.7513 with the greenback up 0.2%.

Today

The SPI Overnight closed down -21 points or -0.3%.

Today brings local February trade data.

ARB Corp ((ARB)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
A2M	a2 Milk Co	Downgrade to Sell from Buy	Citi
ABP	Abacus Property	Upgrade to Outperform from Neutral	Macquarie
AGL	AGL Energy	Upgrade to Add from Hold	Morgans
BOQ	Bank of Queensland	Downgrade to Hold from Accumulate	Ord Minnett
DHG	Domain Holdings Australia	Upgrade to Buy from Hold	Ord Minnett
GOR	Gold Road Resources	Upgrade to Outperform from Neutral	Macquarie
ILU	Iluka Resources	Upgrade to Neutral from Underperform	Credit Suisse
KLS	Kelsian Group	Upgrade to Outperform from Neutral	Macquarie
MIN	Mineral Resources	Upgrade to Hold from Sell	Ord Minnett
NWL	Netwealth Group	Downgrade to Neutral from Buy	Citi
PDL	Pendal Group	Downgrade to Hold from Add	Morgans
PLS	Pilbara Minerals	Upgrade to Buy from Hold	Ord Minnett
SGM	Sims	Downgrade to Neutral from Buy	Citi
WSA	Western Areas	Upgrade to Add from Hold	Morgans

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

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