The morning catch up: ASX on the back foot; interest rates likely to rise again; China economy slows

The ASX hit a two-month low yesterday as a hotter than expected inflation print triggered a sharp selloff. The local bourse is likely to fall again today, with ASX 200 futures trading 13 points lower, down -0.18% as of 8:20 am AEDT.

Speaking of yesterday’s carnage, IG Markets analyst Tony Sycamore said, “the market was already on the back foot early in the session. However, things took a turn for the worse at 11.30am, hit by the left-right combination of a stronger-than-expected monthly Australian CPI print (6.8% vs 6.4% expected) and weaker than expected China Manufacturing PMI (48.8 vs 49.4 expected). A massive MSCI rebalancing sell order in the match out delivered the knockout punch.

“On a big day like yesterday, the heavyweight miners, energy and bank stocks are never far from the action. BHP (ASX:BHP) fell 3.38% to $42.02, CBA fell 2.42% to $96.78 and Woodside fell 2.28% to $34.30. Those three stocks alone accounted for 44 points (37%) of yesterday’s 118-point fall in the ASX200.”

Major US benchmarks also declined: hawkish Fedspeak and a pullback in tech stocks were the main drags.

Sycamore explained, “For the month, the Nasdaq gained 7.61%, the S&P500 gained 0.25%, and the Dow Jones lost 3.49%. We expect AI mania to remain a driver of the Nasdaq in the months ahead, with the technology still too early in its lifecycle to disappoint expectations. Pullbacks will likely be met by buyers who missed the run higher in recent months.

“Turning to the data, the release of a more robust than expected JOLTS Job openings report (10.1mn vs 9.2 exp) was offset by dovish Fed Speak, easing expectations of a rate hike at the upcoming June FOMC meeting.

"Later today, the US House will likely approve the Debt Ceiling deal. Attention now turns to the release of the ISDM manufacturing data tonight and Friday’s Non-Farm Payrolls data, both of which are previewed here.

China’s slower-than-expected post-COVID recovery is also weighing on markets.

The country’s manufacturing PMI (Purchasers Managing Index) fell to 48.8 in May from 49.2 in the previous month. The fall was unexpected and well below consensus expectations of a rise to 49.4.

A slowdown in China’s steel industry is also having an impact, contracting at a faster pace in May, with PMI falling 9.8 points to 35.2. It is the third consecutive contraction.

According to Citi analysts, “The Chinese economy could be at the risk of a double dip. Insufficient demand is the major concern now... Goods deflation is weighing on profitability ... the Chinese economy could be on the verge of a self-fulfilling confidence trap … decisive policy actions are needed."

Here’s what we saw (source Commsec):

US markets

Finished lower on Wednesday ahead of a US House of Representatives vote on a bill to lift the US$31.4 trillion debt ceiling limit.

Advance Auto Parts shares plunged 35% after the auto parts retailer cut its full-year forecasts. Shares of tech hardware company HP dipped 6% on mixed quarterly results.

C3.ai shares slipped 9% ahead of the AI software maker's quarterly result. Nvidia shares retreated 5.7%, taking a breather from their recent run. But Intel (NASDAQ:INTC)'s shares jumped 4.8% after the turnaround.

At the close of trade, the Dow Jones index fell by 134.5 points or 0.4%, the S&P 500 index dipped by 0.6% and the Nasdaq index shed 82 points or 0.6%. In May, the Dow Jones fell by 3.5%, but the S&P 500 added 0.3% with the Nasdaq soaring 5.8%.

European markets

Dropped to two-month lows on Wednesday. Autos stocks fell by 2.5% and shares of China-linked luxury goods firms were down 2.9% after data showed factory activity in the Asian country shrank faster than expected in May on weakening demand.

French consumer prices fell by 0.1% in May with the annual inflation rate easing from 6.9% to 6% (survey: 6.4%).

The continent-wide FTSEurofirst 300 index fell by 1.1% to be 3.1% lower in May. The UK FTSE 100 index slid 1% and was down 5.4% in May.

Currencies

• Currencies were mixed against the US dollar in European and US trade.
• The Euro fell from US$1.0701 to US$1.0634 and was near US$1.0690 at the US close.
• The Aussie dollar rose from US64.58 cents to US65.05 cents and was near US65.00 cents at the US close.
• The Japanese yen lifted from 140.35 yen per US dollar to JPY139.23 and was near JPY139.35 at the US close.

Commodities

Global oil prices dipped by up to 2% on Wednesday, pressured by weak data from top oil importer China that fed crude demand fears.

• The Brent crude price fell by US88 cents or 1.2% to US$72.66 a barrel.
• Brent crude futures for August delivery settled down US$1.11 to US$72.60 a barrel.
• The US Nymex crude price was down US$1.37 or 2% to US$68.09 a barrel.

Base metal prices were mixed on Wednesday.

• Copper futures slid 0.7% after data showed factory activity in China shrank faster than expected in May. But aluminium futures lifted 1.2%.
• The gold futures price rose by US$5.00 or 0.3% to US$1,982.10 an ounce.
• Spot gold was trading near US$1,962 an ounce at the US close.
• Iron ore futures dipped by US13 cents or 0.1% to US$105.07 a ton.

Interest rates likely to rise

While the markets are currently assessing whether the Australian economy has hit a wall and whether inflation will be entrenched at around 5% to 6%, so too is Reserve Bank of Australia governor Phillip Lowe.

Given the latest inflation figures, analysts have Lowe raising rates by another 0.25, which will take the cash rate to over 4%.

If he does so, he may well force renters back into their parents' garage or find a housemate.

Sycamore said, “From next to zero chance yesterday morning, the Australian interest rate market is now pricing in an almost 25% chance of an RBA rate hike next week. A full 25bp interest rate hike is priced by August, which would take the cash rate to 4.10%.

"As yesterday’s inflation reading was from the first month of a new quarter, it did include data from the services sector, which is where a lot of the inflation headaches globally are coming from.”

It comes at a time when US Federal Reserve officials are looking to slow down the pace of rate rises.

Philip Jefferson – President Joe Biden's nominee for Fed vice-chair said “skipping" a rate hike at a coming meeting would allow officials to “see more data".

Philadelphia Fed president Patrick Harker, who is a voting member of the FOMC this year, similarly agreed: "I think we can take a bit of a skip for a meeting and frankly, if we’re going to go into a period where we need to do more tightening, we can do that every other meeting.”

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