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The Overnight Report: Just Buy It Anyway

Published 08/02/2023, 10:51 am
Updated 09/07/2023, 08:32 pm

By Greg Peel

But Wait, There’s More

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.”

And with that the ASX200 fell from around up 10 yesterday pre-RBA statement to down -35.

It was not about the 25 point hike to 3.35% — that was well anticipated. But there had been some hope the RBA might from there look to pause, weighing up not just stronger inflation but other factors negatively impacting on the economy and households, and to acknowledge the lag to full rate hike impact. But no.

After the higher than expected December CPI print, and no sign yet of a peak, despite that being the call, the RBA has strengthened its resolve. The above comment is a step up from what the board suggested in December:

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.”

It is now. There were already forecasts for a peak rate set at 3.85%, or two more hikes from here, and that is now where consensus has converged. We recall Deutsche Bank (ETR:DBKGn) had already forecast 4.10%.

The response in the stock market was predictable. The most rate-sensitive sectors, and/or household spending-sensitive sectors, were the hardest hit. Real estate fell -1.6%, healthcare -1.4%, discretionary -1.3% and staples -1.2%.

Discretionary was not helped by ARB Corporation Ltd (ASX:ARB), which following a trading update fell -12.4%.

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Perhaps the surprise is that technology only fell -0.4%. Maybe investors are tired of volatile ups and down on bond yields and the Nasdaq.

Speaking of bond yields, the Aussie ten-year yield jumped 14 points to 3.59%. So much for last week’s crunch.

One might expect higher rates to be good for the banks, but in the rarefied air above 3% cash the screws are turning harder on borrowers. Financials weighed up the impact and fell -0.1%.

Macquarie Group Ltd (ASX:MQG) nonetheless rose 0.7% on its quarterly update.

The only sectors to close in the green were energy and utilities, on higher oil prices. More on that below.

So, a bit of a reset after a month of exuberance. A bit of a back to earth. That said, notice where the index pulled up – 7504. The 7500 former resistance level now becomes support.

And after Wall Street absorbed fresh Powell-speak last night and rallied, our futures are up 34 points this morning.

So what was all the fuss about?

But Wait, There Might Be More

Down, up, down and finally up. That was the story on Wall Street last night. Still reeling from Friday’s jobs number, and fearing the relaxed and comparatively dovish Fed chair of last week would return to being grave and schoolmasterly, the Dow was down -100 points ahead of Powell’s speech last night.

But no. Initially he acknowledged the positive signs of disinflation. This was promising. But he did qualify in noting disinflation was concentrated in goods prices, and not so much the rest of the economy (eg services, rent, wages), and that it take a lot longer for those prices to retreat, but Wall Street liked it anyway. The Dow was now up 280.

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Yet just when all looked rosy he said, in not so many words, “We remain data-dependent. If we get another jobs number like last Friday’s then clearly we’ll have to keep at it”. Suddenly the Dow was down -240.

Yet at that point the S&P500 had slipped under 4100. That level is to Wall Street what 7500 is to the ASX200 – resistance that is now support. Powell didn’t say anything more, but Wall Street turned and the Dow closed up 227.

Funny old market.

In Australia, we had assumed yesterday’s 25 point hike and now expect two more in the next two meetings. In the US, last week’s 25 points was expected and now Wall Street assumes two more, in March and May (no April meeting).

That’s 3.85% for us and a range of 5.00-5.25% for them. The latter is about where the FOMC pitched its average peak rate forecast back with the December dot plots.

But it all depends on the data.

In corporate news, Microsoft Corporation (NASDAQ:MSFT) is set to incorporate ChatGPT’s AI technology into its Bing search engine. Does anyone use Bing? Google (NASDAQ:GOOG) has signalled a red alert.

Commentators are pointing out that AI is already in widespread use in a number of platforms servicing a number of areas. But the thought of asking Bing to write your assignment for you is another matter. Might not need so many journalists.

[Disclosure: I am not a robot.]

Microsoft (Dow) rose 4.2%.

Commodities

No let up in quietly tumbling metal prices.

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In the wake of the earthquake, operations have been suspended at a Turkish oil terminal as a precaution. The suspension is not expected to last long.

Meanwhile, Saudi Arabia has for the first time in six months lifted the sale price on its light crude, in anticipation of increased demand from a reopened China. Together these factors drove oil prices higher.

A hawkish RBA has the Aussie up 0.9% at US$0.6945.

Today

The SPI Overnight closed up 34 points or 0.5%, or what the index fell yesterday.

Joe Biden will this morning (our time) deliver his State of the Union address.

Earnings results are due today from Amcor PLC (ASX:AMC), Bapcor Ltd (ASX:BAP), Megaport Ltd (ASX:MP1) and Suncorp Group Ltd (ASX:SUN), among others.

Resmed Inc DRC (ASX:RMD) goes ex.

"The Overnight Report: Just Buy It Anyway" was originally published on FNArena.com and was republished with permission.

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