The Overnight Report: Nothing To See Here

Risky Trade

It seems the computers were very excited yesterday in the wake of the big drop in annualised US inflation, shooting the ASX200 up 50 points from the open when the futures suggested only 16. But by 11.30am it was all over, and the index was back to square.

This seemed a sensible place to be ahead of the Fed release last night but at least someone decided to take the punt. The index was sitting on support back at 7200. Buy.

There followed a steady upward course for the rest of the session as buying fed on itself.

Every sector closed in the green. Not being the life of the Christmas party however were the consumer sectors, with discretionary up only 0.1% and staples 0.2%, likely reflecting surveys suggesting we’re all going to be a little more frugal this Christmas.

The banks were also wallflowers (+0.1%) after Macquarie and Citi threw cold water on Tuesday’s rally, which was driven by a strong trading update from Bendigo And Adelaide Bank Ltd (ASX:BEN). Both pulled their rating back to Hold, and Bendelaide shares fell back -3.3%.

Otherwise, the punch bowl was being well patronised.

Energy (+1.4%) and materials (+1.0%) led the way on higher commodity prices, which were largely due to a big drop in the US dollar overnight following the CPI result.

Utilities scored biggest percentage move (+2.1%), as analysts suggest the government’s gas price cap will not much affect profits for the big energy providers.

Technology was also strong (+1.7%), mimicking the Nasdaq, or in the case of Block Inc (ASX:SQ2), which jumped 8.1%, mimicking itself.

St Barbara Ltd (ASX:SBM) was the star of the day, jumping 13.8% after completing a capital raise and merger with fellow gold explorer/developer Genesis Minerals Ltd (ASX:GMD).

Woolworths Ltd (ASX:WOW) has made an interesting move ahead of the festive season, dumping -$636m of its Endeavour Group Ltd (ASX:EDV) holding. Woolies is apparently looking to move further into the pet industry. Endeavour fell -4.3%.

Anyway, that was yesterday. After a wild old ride on Wall Street post the Fed release last night, our futures are down -61 points this morning.

So, as you were.

Join the Dots

The Dow was up 260 points last night ahead of the 2pm Fed statement release. Half an hour later it was down -400. Half an hour after that it was square. It eventually closed down -142.

US bond yields and the US dollar index similarly tacked wild paths. It’s not hard to see why sensible investors tend to stay out of the market on a Fed day, making their moves the following day when the dust has settled.

It had nothing to do with the Fed hiking by only 50 points, to 4.25-4.50%. That was baked in. It was all to do with dot plots and inflation forecasts.

Seventeen of nineteen eligible Fed officials provided their terminal (peak) rate forecasts as suggested by the dot plots. The median of those forecasts was 5.10%, implying 5.00-5.25%. The low marker was 4.75-5.00% and the high marker was 5.50-5.75%.

The 5.1% median is up from 4.6% in the September dot plots. The FOMC also raised its expectations for core PCE inflation, now seeing a fall to 3.5% in 2023 from 4.8% in 2022, when previously the forecast was a fall to 3.1% from 4.5%.

The initial fall in the stock indices likely reflected hope the two consecutive drops in monthly inflation might have led to the Fed backing off. But the Fed did back off, to only 50 points.

“The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases. But it will take substantially more evidence to give confidence that inflation is on a sustained downward path,” said Jerome Powell.

Remaining in the statement from November was the FOMC “anticipates that ongoing increases in the target range will be appropriate.” Some were hoping this December rate rise might lead to a pause in the new year.

But only some. For most, Powell delivered few surprises. Hence the ups and downs. The market had already priced in a 5% terminal rate. Fed speakers over the past couple of months have been suggesting somewhere between 5% and 5.5%.

We’ll wait to see how the cooler heads respond tonight after they’ve had time to digest.

The Fed statement comes out just as the LME is closing for the day. The initial response was a surge in the US dollar, which likely explains falls in metals prices. Then the US dollar shot right back down again.

This does not apply to the oils however. Oil prices rose last night after OPEC and the International Energy Agency both forecast a rebound in demand over the course of next year and as US rate hikes are expected to ease alongside slowing inflation.

The Aussie’s been around the block a bit as well in the past couple of hours. It’s currently little changed at US$0.6864.

Today

The SPI Overnight closed down -61 points or -0.8%.

Big day today. And night.

Locally we’ll see November jobs numbers.

New Zealand gets off the couch and reports September quarter GDP. Ah, those were the days. The NZ government yesterday forecast a recession next year.

China reports November industrial production, retail sales and fixed asset investment.

The Bank of England and ECB both hold policy meetings tonight.

The US will also see November industrial production and retail sales.

Australia and New Zealand Banking Group Ltd (ASX:ANZ), Computershare Ltd. (ASX:CPU) and Elders Ltd (ASX:ELD) hold their AGMs.

Locally we could be in for our own wild ride today. The futures are predicting a fall of -61 which would take us back below 7200, but yesterday investors indicated that’s a level at which they're willing to buy. Or at least they were.

The December futures contract expires today. As do index options, and I assume there’s a concentration of positions around the 7200 strike. Volatility alert.

"The Overnight Report: Nothing To See Here" was originally published on FNArena.com and was republished with permission.