The ASX has been steady post the King’s Birthday holiday. The ASX 200 gained gaining 12.80 points or 0.18% to 7,135.30. Over the last five days, the index is virtually unchanged but gained 1.37% over the last year to date.
The top-performing stocks in this index are Paladin Energy Ltd (ASX:ASX:PDN) and AUB Group Ltd, up 9.71% and 5.92% respectively.
Looking at the sectors, Energy was the worst performed, down 1.56%, while Information Technology soared 3.66%.
Oil prices fell to their lowest level since December 2021. A slowing US economy and Russian exports continue to add downward pressure, despite Saudi Arabia announcing more production cuts in a bid to drive up prices.
Uranium was another commodity of note. It hit a record high of US$64 in April 2022 as Russia's invasion of Ukraine sparked concerns about energy security. Prices have jumped more than 14% for 2023 to $US55.50. The price is being nudged by financial interest on low volume and driven on speculation about how nuclear may contribute to net-zero aspirations.
Today’s steady performance reflects general international market sentiment. Wall St gained on Monday and is likely to do so again overnight as US investors bet on now unpleasant surprises from US inflation data to be released at 10.30pm AEST and Thursday's interest rate decision by the Fed.
Headline and core CPI are forecast to rise by 0.1% and 0.4%, respectively, which would see the headline rate fall to 4.1% YoY from 4.9% in April, with base effects and a sharp fall in energy playing leading roles in the deceleration.
Core inflation is expected to fall to 5.2% YoY from 5.5% in April.
IG analyst Tony Sycamore made the following observations about what to expect:
Headline YoY at 4.8% or higher (10% probability): Get out of the way as the rates market moves to price in a Fed rate hike in June and July (currently only 20bp priced for both). US equity markets will dive while the US dollar will soar.
Headline YoY between 4.4% and 4.7% (25% probability): An uncomfortable outcome that will likely see the rates market price in an increased chance of a rate hike on Thursday (from 18% to 45%). The US dollar will strengthen and equities (SPX) should fall between 0.5% to 1.5%, with a greater fall expected if the headline is at the top end of the range, accompanied by a sticky core read, say 5.6% to 5.9%.
Headline YoY between 4.1% and 4.3% (55% probability): A positive outcome for equities and a drag for the US dollar as the market comes closer to the idea that the Fed's tightening cycle is at or near the end.
Headline YoY at 4% or lower (10% probability): The headlines will scream, 'Mission accomplished, the Fed is done!' Stocks will soar, the US dollar will dive, and the rates market will likely start to price in rate cuts before year-end.
Three things to watch
eToro market analyst Josh Gilbert shares his things to watch in the coming days.
1. US Inflation
Markets are looking for another fall in US inflation, with expectations of a headline reading of 4.1%.
For the Fed, a cooling headline print will be welcomed but their attention will be on core prices that are likely to remain sticky and cause a further headache for Jerome Powell. The Cleveland Fed’s nowcast of inflation suggests that the core inflation reading will come in at 5.3%.
If these readings align with estimates, it would show that the headline continues to move in the right direction, thanks to falling energy costs, but underlying inflation, excluding energy, is still well above where the Fed would like it to be. Jerome Powell’s job is to get inflation down, and although inflation is moving in the right direction, officials know they need to see progress in services prices to reach the golden 2% target.
2. Fed Rate Decision
The final piece in the Fed’s puzzle, US inflation, is released just a day before the board meeting to decide their next policy move. For now, it seems that the market consensus is for the Federal Reserve to pause its jumbo hiking cycle, and so far, market pricing hasn’t been wrong.
However, a hike would be a big shock to markets, putting equities under pressure and strengthening the US Dollar. But what's key for investors to understand is that a pause doesn’t mean the end.
Expectations are rising for the Federal Reserve to hike in July, but the bigger risk is if the door is left open for not just one but two hikes this year, which would fade away hopes of rate cuts this year, something investors are not pricing in. Nevertheless, a pause from the Federal Reserve will likely be met with a rally from US markets, led by tech.
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