By Greg Peel
Release the Doves
Wall Street had closed flat on Monday night but the ASX200 opened down -26 points yesterday, which included ex-dividends, ahead of the afternoon’s RBA statement. At 2.30pm the index was back to square. At 2.31pm it was up 40.
“The Board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary. In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.” [My emphasis]
The words “tightening of monetary policy” replaced “further increases in interest rates” in the previous statement. The word “when” was not there last time. When it comes to assessing the RBA’s thinking, subtle changes in language are key.
So we got another 25, but “further tightening” could mean only one more, whereas “further increases” meant more than one more back in February. Yep, subtle. And “when” implies the board will be following the data. The statement made a nod to the recent CPI print, which suggested inflation had peaked.
So every sector rose yesterday, except materials. Gold prices fell overnight (and a lot more last night) and a couple of reports have surfaced from analysts suggesting lithium prices have hit their peak.
While energy and the consumer sectors posted gains of around 1%, the banks were again leading the charge in adding another 0.9%. More mortgage relief.
Having fallen sharply on Monday, yesterday the Aussie ten-year yield fell another -8 points to 3.68% and the two-year -13 points to 3.37%.
I could go on, but unfortunately we don’t live in isolation here downunder. Last night the Fed took a completely opposing view to the RBA, and our futures are down -60 points this morning.
It was fun while it lasted.
A couple of stock moves to note: Invocare Ltd (ASX:IVC) investors nearly died when they learned of a takeover bid from private equity, which sent that stock up 35.0% (which would have inflated consumer discretionary’s 1.1% gain), while Megaport Ltd's (ASX:MP1) CEO resigned and that stock fell -15.0%.
Bravura Solutions Ltd (ASX:BVS) fell -54% following a highly dilutive capital raise.
Release the Hawks
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
-Powell’s written testimony to Congress
Australian inflation has shown the first signs of peaking but US inflation peaked last year. The problem is US inflation has not since tracked a smooth trajectory downwards, rather the pace of CPI reduction has eased and the PCE actually went up in January.
Australia’s January jobs report was weaker than expected while the US report was far stronger. Australia’s December GDP was weaker than expected but the US result showed an economy still very much alive and kicking despite Fed rate hikes to date.
At the last meeting, the Fed hiked by only 25 points, having hiked by 50 points the meeting before and 75 at all four meetings before that. Wall Street assumed 25s were now the norm, ahead of a pause.
A few Fed presidents disagreed, wanting another 50 pointer, but Wall Street was not convinced and the presidents are not voting members anyway. The last Fed meeting was just before the strong jobs report, which preceded the latest inflation data.
Wall Street is now convinced the next hike, in two weeks’ time, will indeed be 50. The only possibility of upsetting that view is if Friday’s February jobs number is a lot weaker than forecast, and next week’s CPI and PPI data show substantial falls.
Last night Wall Street wasn’t waiting to find out. The indices closed on their lows, and the best we can say is the S&P500 is yet to return to its 200-day moving average, from which it bounced last week.
The US ten-year bond yield fell -1 point to 3.98% last night. The two-year yield jumped 12 points to 5.02%. The reason the ten-year did not match the two-year is it is pricing in recession.
The ten-two spread is now -104 basis points – the steepest yield curve inversion since 1981.
Hopes for a soft landing, let alone “no landing”, have further evaporated.
Commodities
…and a resilient US economy was part of the equation, along with China’s reopening, keeping commodities prices bid. Not last night.
Falls were exacerbated by a 1.2% surge in the US dollar index – a rarely seen move.
Gold was a clear victim.
As was the Aussie. With the RBA possibly set to back off its policy tightening as the Fed looks to ramp up, the Aussie is down a full -2% at US$0.6593.
Today
The SPI Overnight closed down -60 points or -0.8%.
Following on from yesterday’s statement, the RBA governor will speak today.
The US will see private sector jobs numbers for February.
Today’s big ex-div are that of Woodside Energy Ltd (ASX:WDS), followed by Super Retail Group Ltd (ASX:SUL) and a handful of others.
You don’t want to know what’s going to happen tomorrow.
"The Overnight Report: The Need For Speed" was originally published on FNArena.com and was republished with permission.