The Overnight Report: Bring It On

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World Overnight
SPI Overnight	7328.00	+ 43.00	0.59%
S&P ASX 200	7316.20	– 30.80	– 0.42%
S&P500	4175.48	+ 20.10	0.48%
Nasdaq Comp	12563.76	+ 27.74	0.22%
DJIA	33128.79	+ 67.29	0.20%
S&P500 VIX	29.25	– 3.09	– 9.55%
US 10-year yield	2.96	– 0.04	– 1.20%
USD Index	103.47	– 0.15	– 0.14%
FTSE100	7561.33	+ 16.78	0.22%
DAX30	14039.47	+ 100.40	0.72%

By Greg Peel

Very Interesting

Well, no one saw that coming. Maybe the odd Uber driver but not economists. At the end of the day it was really just a matter of timing – economists had expected a 15 point rate rise from the RBA to 0.25% yesterday followed by 25 points in June to 0.50%, or if not, given the election, 40 points in June to reach 0.50%.

While the timing might be irrelevant, outside politics, it is clear the RBA has become more hawkish since the last CPI print, a la the Fed. And like Jerome Powell, Philip Lowe had previously stuck to a mantra of “no rate rise before 2024”. Given yesterday’s surprise 25 point hike to 0.35%, the assumption is June will now bring a full 40 points, straight to 0.75%.

Plus the RBA will now commence a balance sheet “run-off”, which means not replacing maturing bonds in the QE portfolio. This is likely to start in July.

The board now forecasts headline inflation to reach 6% by year-end, and core inflation to reach 4.75%. Thus: “it is appropriate to start the process of normalising monetary conditions.” Some inflationary pressure is down to global factors, the board suggested, but “domestic capacity constraints” have broadened inflation and businesses are now forced to pass price increases on to consumers.

No mention, as one might expect from an apolitical institution, of the government’s direct and indirect handouts in the budget, and from both parties, pledges of more to bring down the “cost of living” by politically popular means which will only add more fuel to inflation.

In a 4pm press conference, Philip Lowe noted he has highlighted in the past that it is “not unreasonable to expect” interest rates to eventually get back to 2.5%, although no time frame had been offered given the uncertainties.

“The Board is not on a pre-set path and will be guided by the evidence and data as it takes the necessary steps to achieve the medium-term inflation target and support full employment in Australia.”

The RBA’s forecasts suggest 1.50-1.75% by end-2022 and 2.5% by end-2023. If we assume 0.75% by June, even 1.50% is another three 25 point hikes this year.

Guess what kiddies – rates can actually go up as well as down. This is one consideration not lost on the RBA – a generation of mortgage-holders who until yesterday didn’t know what a rate hike is.

The ASX200 meandered around yesterday to be little changed by the 2.30pm statement release. It then promptly dropped around -40 points in a hurry, before recovering a bit to the close.

Funnily enough, the hardest hit sectors yesterday were two supposed “inflation hedges”.

Real Estate fell -1.3%, despite the fact some (but far from all) REITs run on CPI-linked leases. Higher rates mean higher rents (good) meeting lower consumer demand (bad), hitting not just shopping malls but the logistics warehouses that supply them. And their offices.

Materials fell -1.0%, but that was about bulk commodity prices.

Bearing in mind the rate hike-impacted sectors had been creamed on Monday without anyone tipping 35 points, falls in the consumer sectors and communication services were modest, while healthcare actually rallied 0.4% after CSL ((CSL)) announced its plasma collections were back to pre-pandemic levels.

Utilities fell -0.5% as the AGL Energy ((AGL)) board dug its heels in regarding its planned demerger which could either (a) be derailed by Cannon-Brookes of (b), result in no buyers in sight for the legacy coal-fired business. AGL fell -3.1%.

The good news? The good news is the uncertainty, and the waiting game, is over. The RBA is now hawkish, more so than previously expected, but we’re now into “the rate hikes that had to happen”, and the market understands that.

Enough to have the futures up 42 points this morning on a modest Wall Street rebound overnight, ahead of Round 2 of “guess the number”. Could the Fed take the RBA’s lead and go the full 75 tonight?

Setting the Springboard

Probably not, but there will likely be some relief to see the expected 50 points in writing tonight. Thereafter, it will come down to hints about the next rate rise, and the speed of Fed balance sheet reduction, which will include not just a “run-off” but actual selling of bonds back into the market.

Wall Street bounced back and forth last night around the flat-line before closing on a slightly positive note.

As is the case in Australia, investors are looking forward to simply getting this meeting out of the way. In the US it is expected tonight will likely be the start of a run of super-sized rate hikes towards a 2.25% funds rate by year-end. No one is surprised.

Debate still rages as to whether a recession will follow.

There is not much more to say before tonight.

Out of interest, a tale of two “re-opening” stocks has unfolded this morning in the Wall Street aftermarket on earnings reports. Airbnb is up 5%, while Lyft – the US-only Uber competitor – is down -26%.

Commodities

Spot Metals,Minerals & Energy Futures
Gold (oz)	1868.00	+ 4.60	0.25%
Silver (oz)	22.52	– 0.06	– 0.27%
Copper (lb)	4.43	– 0.02	– 0.35%
Aluminium (lb)	1.45	– 0.03	– 1.75%
Lead (lb)	1.03	– 0.00	– 0.17%
Nickel (lb)	14.45	0.00	0.00%
Zinc (lb)	1.89	– 0.01	– 0.28%
West Texas Crude	102.41	– 2.76	– 2.62%
Brent Crude	105.96	– 1.79	– 1.66%
Iron Ore (t)	143.56	– 2.74	– 1.87%

Bearing in mind China was absent yesterday, and will be almost all week, vague commodity price weakness is reflecting the gradual move to an expected full lockdown of Beijing before too long, with the Shanghai lockdown remaining endless.

The Aussie had a fun day out yesterday, peaking very briefly at US71.42c post RBA release, and then dropping back again, before settling at US70.99c this morning, up 0.6% in 24 hours.

Today

The SPI Overnight closed up 42 points or 0.6%, in line with the S&P500.

Today we’ll see local numbers for March retail sales and housing finance – both of great interest under the circumstances (if not a bit old).

China and Japan are both closed today.

The US will see April private sector jobs numbers ahead of the Fed statement and press conference.

ANZ Bank ((ANZ)) reports half-year earnings today.

Amcor ((AMC)) and Janus Henderson ((JHG)) report quarterly earnings.

Bank of Queensland ((BOQ)) goes ex.

The Australian share market over the past thirty days…

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
DXC	Dexus Convenience Retail REIT	Downgrade to Hold from Accumulate	Ord Minnett
KGN	Kogan.com	Downgrade to Underperform from Neutral	Credit Suisse
NIC	Nickel Mines	Upgrade to Outperform from Neutral	Credit Suisse
		Upgrade to Outperform from Neutral	Macquarie
PLS	Pilbara Minerals	Upgrade to Outperform from Neutral	Credit Suisse
QAN	Qantas Airways	Downgrade to Accumulate from Buy	Ord Minnett
RCW	RightCrowd	Downgrade to Hold from Speculative Buy	Morgans
RRL	Regis Resources	Upgrade to Outperform from Neutral	Macquarie
RWC	Reliance Worldwide	Upgrade to Outperform from Neutral	Macquarie
SLR	Silver Lake Resources	Downgrade to Neutral from Outperform	Macquarie
SUL	Super Retail	Upgrade to Buy from Accumulate	Ord Minnett
TCL	Transurban Group	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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