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Aussie stocks were set to open sharply higher after inflation slowed more than expected in the US, easing pressure on the Federal Reserve to raise rates aggressively.
A relief rally lifted two of Wall Street’s three main indices by more than 2 per cent. The Nasdaq Composite soared almost 2.9 per cent.
The S&P/ASX 200 was poised to open at its highest level in eight weeks. ASX futures climbed 70 points or 1.02 per cent.
The Australian dollar soared back above 70 US cents as the greenback retreated. Oil, copper and gold rose. Iron ore was flat.
Wall Street
US stocks surged as investors welcomed the July consumer price index as a sign inflation may finally have peaked. The odds on a 75 basis points rate increase next month fell after the report showed consumer prices levelled off last month.
The S&P 500 soared 88 points or 2.13 per cent to its highest level since May. The Dow Jones Industrial Average rallied 535 points or 1.63 per cent. The Nasdaq Composite gained 361 points or 2.89 per cent as investors favoured growth stocks over value sectors.
Consumer prices were flat last month after rising 1.3 per cent in June. The consumer price index increased by a smaller-than-expected 8.5 per cent from a year ago, down from a gain of 9.1 per cent in June.
Core inflation – the measure favoured by the Fed – also came in lower than expected. Core consumer prices increased by 0.3 per cent, the weakest monthly growth in ten months.
Chicago Fed President Charles Evans said the report was the first “positive” inflation report since the central bank began hiking in March.
Futures markets marked down the likelihood the Fed will raise the federal funds rate target by 75 bp next month. The odds fell from 68 per cent before the report to 43.5 per cent. The odds on a 50 bp increase rose to 56.5 per cent.
“For the market, it’s sort of a Goldilocks scenario right now because you have the labor market holding up and inflation potentially starting to come down. That is what a soft landing would look like,” Shawn Snyder, head of investment strategy at Citi US Wealth Management, told Reuters.
All 11 US sectors advanced. Investors favoured growth stocks as bond yields declined. The Russell 1000 Growth Index gained 2.65 per cent, versus a 1.88 per cent rise in the Value Index.
Big Tech saw some of the night’s best returns. Netflix jumped 6.16 per cent. Facebook owner Meta Platforms put on 5.82 per cent.
Travel stocks rebounded from selling pressure earlier in the week. The big three cruise lines all gained at least 9 per cent.
Australian outlook
Hallelujah. US investors finally got the inflation report they have been praying for these last few long months. One swallow may not make a summer, but it is a very good start.
The S&P/ASX 200 should reverse yesterday’s 36-point fall and push well away from the 7000 level. The domestic market has built good momentum as confidence increases that the worst of this year’s sell-off is behind.
Local investors will be delighted to see basic materials topping US sector gains. The sector flew up 2.88 per cent overnight, beating out three sectors dominated by “Big Tech” (I.T., consumer discretionary and communication services) for top spot. BHP and Rio Tinto caught some of the up-draught (more below).
Financials gained 2.32 per cent on favourable moves in the yield curve. Industrials added 2.22 per cent. Bond proxies trailled, but still booked solid gains as the rising tide lifted most ships.
If there is a negative from the overnight action, it might be a huge move in the dollar. The Aussie soared 1.79 per cent to 70.79 US cents as forex traders reduced their expectations for this US rates cycle.
A stronger dollar is a broad negative for Australia’s export-driven economy, however by acting as a headwind it reduces pressure on the RBA to increase rates. Winners from the dramatic rally include retailers of imported goods, manufacturers using imported parts, etc.
The busiest day of earnings season so far brings updates from Telstra, AMP, QBE, ResMed, Mirvac and Avita Medical.
The Melbourne Institute’s survey of inflation expectations at 11 am AEST will attract more interest than usual in the current environment. There is a reasonable argument that what consumers think about the outlook for inflation is at least as important as what prices actually do.
IPOs: two new listings originally scheduled for this week have been pushed back, new dates still to be announced.
Commodities
Copper regained US$8,000 a tonne on the London Metal Exchange as buyers shrugged off a two-year high in Chinese inflation. A report yesterday showed China’s consumer price index increased by 2.7 per cent last month, the fastest pace since July 2020 but well below rates in western countries.
Benchmark copper on the LME rallied 1.3 per cent to US$8,080.98 a tonne. Nickel jumped 4.3 per cent, lead 0.4 per cent, zinc 1.2 per cent and tin 0.6 per cent. Aluminium dipped 0.2 per cent.
A larger-than-expected decline in US gasoline inventories last week helped oil overcame early losses. Gasoline stockpiles contracted by five million barrels, easing concerns about weak demand.
“Gasoline demand bounced back and that trend could continue as we are still in the peak [northern] summer driving season,” Edward Moya, senior market analyst at Oanda, said.
Brent crude settled US$1.09 or 1.1 per cent ahead at US$97.40 a barrel. The US benchmark climbed 1.6 per cent to US$91.93.
Gold eked out a slim gain as the US dollar and bond yields deflated. Metal for December delivery settled US$1.40 or 0.1 per cent ahead at US$1,813.70 an ounce. The NYSE Arca Gold Bugs Index advanced 0.89 per cent.
Iron ore traded almost unchanged. The spot price for ore landed in China dipped a cent to US$109.27 a tonne.
BHP‘s US-traded depositary receipts rallied 1.91 per cent. The miner’s UK stock added 0.85 per cent. Rio Tinto tacked on 0.6 per cent in the US and 0.36 per cent in the UK.
