The Overnight Report: Rinse And Repeat

Just the Job

Australia added all of 900 jobs in September. Economists had forecast 25,000. It wasn’t enough to move the unemployment rate off 3.5% nevertheless, or the underemployment rate off 6.0%, and participation remained steady.

It does show the labour market is now slowing. In isolation, this bad news should be good news for the stock market.

The RBA had already decided to only hike by 25 points this month rather than an expected 50 – not because inflation is peaking, as the opposite is true, and the latest food-bowl floods are only going to make things worse, but because it is concerned of the lag effect of higher rates, which are already showing up clearly in the housing market.

The jobs result will perhaps not lead the RBA to pause on Cup Day, but it at least should mean only another 25 despite inflation. And that should have been good news.

The problem is, the Fed is not of the same opinion, regarding concern over lag effects. With the Fed remaining unforgiving, Wednesday night’s weak auction of U.S. 20-Year US Treasuries had overall US bond rates jumping again. We have little choice but to follow suit.

Yesterday the Aussie ten-year yield rose 11 points to be back over 4% at 4.05%. The two-year rose 12 points to be back at 3.50%.

And so the usual suspects copped another hiding. Technology fell -2.4%, discretionary -1.6%, utilities -1.9% (despite higher oil prices), and healthcare -2.1%.

Due to lower commodity prices, Materials fell -2.4%, with gold miners particularly slammed. Oil prices bucked the trend so the session was to some extent saved by a 3.1% jump for energy.

Aside from oil prices per se, both Woodside Energy Ltd (ASX:WDS) and Santos Ltd (ASX:STO) reported record quarterly revenues yesterday.

Staples played its typical role in only falling -0.4%, but the surprise on the day were the banks. The financials sector closed slightly to the upside. This year surging yields have led the banks lower on loan loss and falling loan demand fears.

Perhaps this was the one sector in which a weak jobs number, implying the labour market has begun to turn and the RBA can go easy, had an impact against the tide.

The bad news is US yields are up again overnight. Our futures are down -25 this morning.

Despite all this latest volatility, the ASX200 is still at the same level it was in early October.

No Let-Up

“We are going to keep raising rates for a while. Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.”

It had all been going so well. The Dow was up 400 points early in the session last night on more strong (not too bad) earnings results, until the Philadelphia Fed president opened his mouth.

The US ten-year yield shot up another 10 points to 4.23% and the two-year 5 points to 4.61%. That’s a new high for the ten-year – highest since 2008. The Fed funds futures rate, which specifically reflects Fed cash rate expectations, hit 5% for mid-2023.

The Dow closed down -90 points.

Earnings results are playing their part, bringing some hope to an oversold market.

Last night AT&T Inc (NYSE:T) (Dow) reported and rose 7.7%, which is a big move for the telco plodder. Another plodder is old world tech stock IBM (NYSE:IBM) (Dow), which rose 4.7% having reported in Wednesday night’s aftermarket.

It was not all so bright though, with Tesla Inc (NASDAQ:TSLA) falling -6.7% after it, too, reported on Wednesday night.

And it’s not looking good tonight for social media stocks. Snap (NYSE:SNAP) has just reported in this morning’s aftermarket, and is down -26%, having already been down -77% from its high going in.

It’s all about advertising – one of the first costs to be cut in a downturn. Snap’s revenues growth is declining heading into the fourth quarter, and visibility is too low for the company to offer any guidance. While Snap is not a tech biggie, advertising is also key for the likes of Meta, Google (NASDAQ:GOOGL) and others.

Whether earnings results can continue to come in better than feared on a net basis, the reality is you can’t fight the Fed.

The Fed wants to see “financial conditions” tighten. This means two things – wider credit spreads and a lower stock market.

Wider credit spreads imply a higher cost of borrowing for corporates beyond that implied by Fed rates hikes, as an additional risk premium is included. A weaker stock market reduces consumer demand on the “wealth effect” basis. Both are needed to lower inflation.

Until the Fed sees signs of lower inflation, it’s not going to stop. Hence, while many on Wall Street believe we can see a rebound rally, few (if any) believe we won’t also later see a new low, probably next year.

Commodities

Global metal producers and buyers will gather in London next week to finalise their contracts for supplies for the year ahead. Traders are pushing the London Metal Exchange to stop accepting Russian metal, fearing its warehouses will become a stockpile for unwanted material that distorts global prices for commodities like aluminium and copper, the Financial Times reports.

The LME has considered a ban but has so far been reluctant to shift from its position as an apolitical exchange and clearing house. Judging by last night’s moves in metal prices, the pressure may become too great.

The US dollar was also steady overnight, balancing out a weaker yen against a strong pound in the wake of Truss’ departure. The yen has not been this low against the dollar since 1990, when it saw a property and stock market blow-up. The BoJ, like the BoE, has been forced to intervene to prop up the currency.

The Aussie dropped as low as US$0.6250 on the weak jobs number, but is back at US$0.6281 to be up 0.1% over 24 hours.

Today

The SPI Overnight closed down -25 points or -0.4%.

AGMs today include those of Insurance Australia Group Ltd (ASX:IAG), Link Administration Holdings Ltd (ASX:LNK) and Worley Ltd (ASX:WOR).

Quarterly reporters include AMP Ltd (ASX:AMP), Allkem Ltd (ASX:AKE) and Coronado Resources Inc (ASX:CRN).

'"The Overnight Report: Rinse And Repeat" was originally published on FNArena.com and was republished with permission.