The ASX is expected to get off to a flat start this morning. ASX 200 futures are trading 1 point lower, down -0.01% as of 8:20 am AEST.
Today’s sentiment will be affected by the Fed’s decision to hike interest rates by 25 bps to 5.25% to 5.50%, the highest in 22 years.
Despite that, the S&P 500 finished breakeven but the Dow powered ahead for a 13th consecutive session. It’s the Dow’s longest winning streak since 1987.
Principal Asset Management chief global strategist Seema Shah said of Powell’s decision, “At today’s meeting, the Federal Reserve (Fed) raised policy rates by 25 basis points, taking the benchmark rate up to 5.25%-5.5%, the highest level since 2001.
"While the market had fully anticipated the decision to raise policy rates, chair Powell gave nothing away regarding future decisions. He repeatedly reiterated the data dependency of the Fed’s next few meetings, simply noting that the FOMC is prepared to tighten policy further, if appropriate.”
What happened overnight
Here’s what we saw (source Commsec)
US markets
Fluctuated on Wednesday as investors assessed mixed earnings results and the Fed's latest rate hike.
Boeing (NYSE:BA) shares lifted 8.7% after it posted a revenue beat for the second quarter. Alphabet (NASDAQ:GOOGL) shares gained 5.8% after the Google parent's second-quarter profit exceeded Wall Street expectations on steady demand for its cloud services and a rebound in advertising. Microsoft (NASDAQ:MSFT) shares eased 3.8% after laying out an aggressive spending plan to meet demand for its new AI-powered services.
Meta Platforms shares rose by 1.4% after Alibaba (NYSE:BABA)'s cloud unit said it would support the Facebook (NASDAQ:META) owner's open-source AI model, Llama. Wells Fargo (NYSE:WFC) shares climbed 2.1% after the bank's board authorised a new share buyback program of up to US$30 billion.
The Dow Jones index rose by 82 points or 0.2%, posting its longest daily winning streak since January 1987. The S&P 500 index fell 0.02% and the Nasdaq index shed 17 points or 0.1%.
European markets
Snapped a six-day winning streak on Wednesday. Shares of luxury goods giant LVMH fell by 5.2% after results showed further evidence of a slowdown in spending by wealthy consumers.
Peers Kering (EPA:PRTP) and Hermes dropped 1.8% and 2.4%, respectively. Christian Dior also lost 4%. Shares of Rolls-Royce (LON:RR) jumped 21.2% after the British aero-engineer raised its full-year operating profit forecast by around 45%.
The continent-wide FTSEurofirst 300 index fell by 0.6% and the UK FTSE 100 index slid 0.2%.
Currencies
Were stronger against the US dollar in European and US trade.
- The Euro rose from US$1.1056 to US$1.1102 and was near US$1.1085 at the US close.
- The Aussie dollar lifted from US67.29 cents to US67.83 cents and was near US67.60 cents at the US close.
- The Japanese yen firmed from 140.98 yen per US dollar to JPY139.97 and was near JPY140.30 at the US close.
Global oil prices fell 1% on Wednesday after data showed US crude inventories fell less than expected and the US central bank hiked interest rates. Crude inventories drew by 600,000 barrels last week, compared with market estimates for a draw of 2.35 million barrels.
- The Brent crude price fell by US72 cents or 0.9% to US$82.92 a barrel.
- The US Nymex crude price slipped US85 cents or 1.1% to US$78.78 a barrel.
- The copper futures price dipped 0.3%.
- Aluminium futures price shed 1.3%.
- The gold futures price rose by US$6.40 or 0.3% to US$1,970.10.
- Spot gold was trading near US$1,972 an ounce at the US close.
- Iron ore futures added US17 cents or 0.2% to US$112.89 a tonne.
Shah went further into Jerome Powell’s decision to raise rates, looking at inflation and future policy decisions.
Receding inflation, strong economic data
“In recent weeks, the market has celebrated a drop in headline inflation to 3% and continued evidence of a resilient labor market. While Powell acknowledged the downside inflation surprise, he slightly downplayed its importance, noting that it is just one month’s data and that markets should not read too much into it.
"He also pointed out that the process of getting inflation down to 2% has a long way to go, potentially taking until 2025, which signals that policy will likely need to remain restrictive for some time.
“In addition, while Powell welcomed that the unemployment rate is unchanged from when the Fed started to raise rates last year, he also pointed out that they are looking for the labor demand/supply dynamics to come back into better balance.
"Historically, labor market conditions have tended to soften when monetary policy is tightened, and, as Powell pointed out, a weakening labor market remains the most likely outcome from here.
Future policy shrouded in mystery
“While the market was very confident that the Fed would raise policy rates today, future policy decisions are considerably less certain. In fact, chair Powell did not provide any hints at all! He pointed out that there are two jobs reports, two inflation reports and a multitude of other economic data releases before the next FOMC meeting in September.
“When questioned, Powell also pushed back at the idea that the Fed has potentially shifted to a pace of rate hikes at every other meeting. Instead, he repeated that the committee could either keep rates steady in September or raise rates at that meeting – truly insightful guidance!
“Our own long-held forecast is for rates to peak at 5.25%-5.5% – their current level. Yet, given the confusing signals of waning inflation but a strong economy, keeping all options on the table seems sensible.
"Indeed, with commodity prices on the rise again and the labor market showing minimal signs of slowing, we can’t entirely rule out the possibility of an inflation resurgence lurking around the corner.
Soft landing hopes
“Powell started 2023 as a lonely figure, believing a soft landing for the US economy was possible. In the past month, however, many Wall Street analysts have capitulated to his view and, as Powell revealed today, Fed staff forecasts have also shifted from recession to soft landing.
"In our view, and despite those shifts, the ‘long and variable’ lags of monetary policy must surely mean that recession risk is still alive and elevated.”
A note on Rio Tinto (ASX:RIO)
The mining giant came out with its quarterly report, noting its challenges, particularly with movements in China.
eToro market analyst Farhan Badami said: “During the first half of the year, Rio Tinto encountered challenges in its performance. Underlying EBITDA was below expectations, with $11.7 billion recorded compared to the projected $11.93 billion. This was a function of costly impairments on its Australian alumina refineries, partly in response to challenges posed by the country's new carbon policy.
“Underlying profits were also down 34% from the previous year despite experiencing a 5% increase in production volume, with profit margins noticeably impacted by the decline in iron ore prices and slow economic recovery in its biggest exporter, China.
“However, the company remains optimistic amid recent speculation regarding stimulus relief in the world's second-largest economy. This is something investors will be following as China's commitment to implementing growth-boosting policies could have a positive impact on demand for iron ore, and Rio Tinto's bottom line.”
What about small caps?
The S&P ASX 200 Small Ordinaries is up 0.78% for the year but closed yesterday flat at 2,879.9.
A few companies in the small cap frame to look out for today are: