The Overnight Report: Reality Bites

By Greg Peel

There She Goes

I suggested yesterday might see some volatility with the ASX200 around the 7200 level, given derivative expiry day, and indeed there was. The morning was a madhouse of ups and downs, each bouncing off a level close to 7200, before the afternoon brought a calm capitulation.

We closed at 7204.

It’s all academic, as Wall Street has tanked overnight and our futures are down -83 this morning.

There were fundamental influences at play as well yesterday to help drive sentiment, and none of them were good – Fed forecasts, strong local jobs numbers, weak Chinese data.

The Fed kicked things off overnight by implying there was still some way to go in 2023 to tame inflation, upsetting a market that hoped the last two lower CPI results might just bring about a pause in rate hikes.

Then we learned Australia added a whopping 64,000 jobs in November, way ahead of forecasts of 19,000, and unemployment remained unchanged at 3.4%. Participation hit a record high (hence the unchanged unemployment rate), as did the employment to population ratio.

Increasing migration, from zero during covid, is behind the surge, ANZ Bank economists point out, and that’s not going to change into next year. Yet the volume of unfilled labour demand is still substantial, implying more upward pressure on wages.

It’s not going to be such a merry Christmas in the Lowe household.

It was never going to be a strong November for the locked down Chinese economy, but the numbers came in a lot worse than expected. Retail sales fell -5.9% year on year when -3.7% was forecast, and industrial production grew by only 2.2% when 3.6% was forecast. Fixed asset investment grew 5.3% year to date, down from 5.8% in October.

China’s National Bureau of Statistics was set to hold an in-person press conference yesterday following the release, but cancelled without explanation.

China is now madly reopening its economy, so November may have brought a nadir, except that covid is running rampant.

The data helped our materials sector down -1.4%, on another down-day for lithium miners in particular. That story is fast running out of charge.

The Australian ten-year bond yield rose 9 points to 3.45% yesterday, which didn’t help real estate (-1.0%), nor consumer discretionary (-1.3%), with the jobs numbers killing off any notion of an RBA pause.

Energy was up 0.4% on higher oil prices, while staples rose 0.7%, helped by an unexplained 7.5% jump for Blackmores Ltd (ASX:BKL) and a 3.4% bounce-back for Endeavour Group Ltd (ASX:EDV) after Woolworths Ltd (ASX:WOW) sold a stake on Wednesday.

But anyway…

Sticker Shock

Despite the fact FOMC members have been calling for a peak Fed funds rate of 5.00-5.50% for some time, Wall Street was disappointed on Wednesday night with forecasts suggesting exactly that, destroying hope that a couple of positive inflation reports might change the Fed’s mind.

The fear is – and has been so now for months – the Fed will prove too aggressive and force the US economy into recession. And just in case there were any doubters, November retail sales data set off the alarm bells.

Economists were not expecting a great Black Friday week this year, given cost of living pressures, but sales fell -0.6% from October when -0.3% was forecast. And that’s a dollar value inclusive of inflation.

That’s it. Batten down the hatches. The Dow fell -950 points.

The Empire State and Philly Fed activity indices for December also came in lower than expected last night. Surely unemployment must begin to rise? Weekly new jobless claims actually fell again last week.

It was all too much.

To rub salt into the wound, the Bank of England and ECB both hiked by 50 points last night, despite both economies doubtless being already in recession. Yet while it might have been 50s all round, the US dollar shot up 0.9%, which is another knife in the side of Wall Street.

The US ten-year bond yield fell -5 points to 3.45% while the two-year remained at 4.24%, further steepening the recession signal of the inverted yield curve.

In the UK, nurses are striking for a 19% pay-rise. They won’t get it, of course, but it is indicative of a seventies-style wage-price spiral that threatens developed economies, ours included.

Wall Street did recover some ground towards the close, but nothing substantial. The S&P500 is sitting right on the pivot-point of 3900.

It has now become a battle of the market versus the Fed. The Fed says it will hike further and then hold, to implement a soft landing. The market says the Fed will be cutting rates before 2023 is out, to combat this inevitable recession.

Commodities

The US dollar surge, and Chinese data, were never going to help commodity prices.

And the Aussie? Despite the strong jobs numbers, and implications for more RBA rate hikes, it’s down a full -2.3% at US$0.6705.

Today

The SPI Overnight (new March contract) closed down -83 points or -1.1%.

National Australia Bank Ltd (ASX:NAB) and Link Administration Holdings Ltd (ASX:LNK) hold their AGMs today.

Enjoy the Christmas party tonight!

"The Overnight Report: Reality Bites" was originally published on FNArena.com and was republished with permission.