The Overnight Report: Risk Back On

By Greg Peel

Sticker Shock

Wall Street saw month-end profit-taking on Monday night but there was going to be none of that malarkey on the ASX yesterday for the last day of January. The futures suggested down -10 and by 11.30am, the ASX200 was up 45. Fed meeting? Who cares!

Then the December retail sales numbers came out.

Sales fell -3.9% in December, having risen 1.7% in November, when economists had forecast a fall of -0.2%. What went horribly wrong?

The obvious factor is the exploitation of America’s Black Friday, which now sees retailers discounting their Christmas inventory in November and sucking the life out of what was forever the Christmas shopping month of December. But sales only rose 1.7% in November – hardly matching December’s -3.9% fall.

We might otherwise argue economists simply underestimated the impact of higher mortgage rates and cost of living on households, which were always going to settle for an austere Christmas.

And we could note travel is not included as a retail sale, and that’s what Australian consumers spent more on in December than “stuff”.

Or we could consider that that -3.9% is seasonally adjusted, and if the ABS data since time immemorial seasonally adjusts for the traditional shopping month of December, not November, well that might just throw the whole series out of whack.

Whatever the case, December was not a great month for retail sales, and may yet be a harbinger of things to come. For what it’s worth, spending on household goods fell -7.8% in the month, fashion retail -13.1% and department stores -14.3%.

So who wins? Consumer staples. Bearing in mind that retail sales number reflects volume x price, a weak result can also imply falling prices, or lower inflation. It’s a rare day when you see Woolworths Ltd (ASX:WOW) top the index winners, up 3.8%, with Coles Group Ltd (ASX:COL) not far behind (2.4%).

I mentioned travel spending? Corporate Travel Managment Ltd (ASX:CTD) took the silver with 2.7% and event company EVT Ltd (ASX:EVT) got bronze on 2.6%.

Consumer staples stole the show with a 2.3% gain on the day – next best healthcare on 1.4% on a similar theme.

If the weak sales number is enough to give the RBA pause for thought, that should be good for real estate (lower rates), except for the big retail landlords in this instance. That sector fell -1.1%.

It should also be good for technology, except that Megaport's (ASX:MP1) update saw that stock plunge -24%, so technology fell -1.3%.

Late morning yesterday, the ASX200 looked like it could well hold above 7500 (7516), if not for the sales numbers. But after a bout of profit-taking on Monday night, it was back to business on Wall Street last night as the buyers piled back in.

Our futures are up 44 points this morning. Just like the ASX200 opened yesterday.

Fight the Fed

Expectation is that tomorrow night the Fed will raise by 25 points and reiterate its intention to continue to raise rates until it is confident inflation can be tamed, and then hold rates there for the rest of the year to ensure inflation cannot once again escape its cage. If this is the rhetoric, then Wall Street won’t be surprised.

Except that Wall Street begs to differ. Investors have indicated in January an assumption of a soft landing for the US economy, which the Fed will turn into a hard landing if it were to push too hard. Wall Street forecasts Fed rate cuts towards the end of the year after such signs become evident.

There is hence a risk Jerome Powell will deliver one of his infamous schoolmasterly rebukes to the market, telling investors they’re not the Messiah, they’re all just naughty boys. The Fed does not want “risk-on” in the context, as that is inflationary.

Or maybe Powell will acknowledge recent indications of inflation having peaked, and tone back the hawkishness. This would be a red rag to the market bulls. A rebuke might rattle some nerves, but we’ll see.

After a last day of the month rush into risk, the S&P500 has set itself in between the 4000 break-out level and the previous highs around 4100, ready to move either way.

Meanwhile, earnings results continue to roll in.

Last night’s winner was General Motors Company (NYSE:GM), up 7.7%, while Caterpillar Inc (NYSE:CAT) went the other way in losing -3.8%. Knocking it out of the park but falling short of exuberant hopes were Exxon Mobil Corp (NYSE:XOM), down -1.8% and McDonald’s Corporation (NYSE:MCD), down -1.6%.

PayPal Holdings Inc (NASDAQ:PYPL) is the latest tech company to announce lay-offs – 2000 in this case.

Surely the impact of widespread tech sector lay-offs will begin to show up in employment data shortly. We see the January numbers on Friday night.

Commodities

It seems the Chinese have not returned to business with any appetite for base metals. Iron ore remains steady nonetheless.

The disparity in oil price moves reflects the front-month contract expiry for Brent.

While the Australian stock market was shocked by the retail sales numbers, bond yields barely moved and the Aussie is only off a tad at US$0.7053, after a big fall on Monday night.

Today

The SPI Overnight closed up 44 points or 0.6%.

We’ll see January house price data today.

The world will report January manufacturing PMIs.

Yesterday China reported a return to manufacturing expansion (50.1 up from 47.0) for the first time since September, reflecting reopening.

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

Credit Corp Group Ltd (ASX:CCP) reports earnings today, while Nufarm Ltd (ASX:NUF) holds its AGM.

"The Overnight Report: Risk Back On" was originally published on FNArena.com and was republished with permission.