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A three-week retreat in Australian shares looks set to continue this morning following falls on Wall Street after a rebound in inflation sharpened the risk of a return to jumbo interest rate hikes.
The S&P/ASX 200 will open 51 points or 0.7 per cent lower, according to futures action. The Australian benchmark looks set for a fresh six-week low as the January rebound continues to wither.
The dollar was knocked down more than 1 per cent to its lowest since early January. Gold closed at its weakest level of the year. Iron ore and most industrial metals declined. Oil broke a seven-session losing run.
The interim earnings season nears its conclusion today with updates from Woodside Energy, Appen and Lynas Rare Earths.
Wall Street
US stocks slumped to their heaviest weekly loss of the year following hotter-than-expected inflation data. Friday’s personal consumption report compounded fears interest rates will go higher this year than the market had previously priced in, and stay up longer.
The S&P 500 sank 42 points or 1.05 per cent. The Dow Jones Industrial Average shed 337 points or 1.02 per cent. The Nasdaq Composite gave up 195 points or 1.69 per cent.
The cost of goods and services in the US increased 0.6 per cent in January. The annual increase in prices was 5.4 per cent, up from 5.3 per cent in December. The rise in annual prices was the first in seven months.
The Federal Reserve’s preferred measure of inflation, the core Personal Consumption Expenditures (PCE) price index, also increased by 0.6 per cent. Annual core inflation ticked up to 4.7 per cent from 4.6 per cent.
“Despite all the heavy-lifting on interest rates by Fed officials for almost a year, they are no closer to bringing inflation down to target, in fact there is evidence inflation is spreading like wildfire. Heck, it isn’t spreading, it is exploding,” Chris Rupkey, chief economist at FWDBONDS, said.
“The risk now is whether the Fed shifts back into full attack mode and delivers a larger 50 bps rate hike at the March meeting, and ups the terminal rate forecast to 6% this year.”
A separate report showed consumer spending increased 1.8. per cent last month, the biggest surge in almost two years. The increase was the first in three months.
The US dollar and bond yields rallied as traders added to bets that the Fed will keep raising rates. Pricing on federal funds futures indicated at least three more rate hikes by June. The odds on further increases also firmed.
The US dollar index climbed to its highest since early January. The yield on two-year US treasuries touched a level last seen in 2007.
“There are inflationary pressures in the economy, the level of inflation is still too high, and it’s going to take more on the monetary policy side to get inflation down,” Cleveland Fed President Loretta Mester told Reuters.
For the week, the Dow lost 3 per cent, its worst result of the year and also a fourth straight weekly decline. The S&P 500 fell 2.7 per cent. The Nasdaq Composite dropped 3.3 per cent.
Australian outlook
The unravelling of all the constructive work done by the S&P/ASX 200 in January looks set to continue this session. The Australian benchmark looks primed for its weakest start since mid-January.
This month’s setback comes as investors factor in significantly higher tops to the current rates cycles both here and in the US and the likelihood inflationary pressures will persist longer than market optimists originally anticipated.
Tony Sycamore, market analyst at IG, foresees further down-pressure in the near term, but says the ASX 200 is nearing a support level where a rebound becomes likely.
“The pullback in the ASX200 from the February 6th 7567 high is nearing the 7200/7000 support band we have been targeting since late January. Providing this support level holds, we expect to see a recovery towards the 7400/7600 resistance area,” he said.
The US materials sector resisted Friday’s sell-off, rising 0.65 per cent. The financial sector also held its ground, firming 0.11 per cent.
The rest of the market saw red. Real estate and technology – two sectors seen as most at risk from increased borrowing costs – were hit hardest, falling 1.81 and 1.77 per cent, respectively.
The dollar was undermined by increased bets on US rate hikes. The Aussie slumped almost a cent to 67.32 US cents.
A challenging earnings season winds up this week. Earnings ‘misses’ have outweighed ‘beats’ on the ASX 200, according to statistics gathered by FNArena. Of the 137 component companies that have reported so far, the investor data services firm rates 41 as beating the analyst consensus, 50 landing ‘in line’ and 46 missing.
The news was better at the top end of the market. Of the 41 companies from the ASX 50 that have reported, 17 beat expectations, 13 were in line and just 11 missed. Analyst upgrades following the reports outnumbered downgrades by two to one.
Woodside Energy tops the list of companies reporting today. Also scheduled for updates are Appen, Downer EDI, Healius, Lynas Rare Earths, City Chic, Liberty Financial, Telix Pharmaceuticals, TPG, Praemium, Yancoal, Dalrymple Bay, Waypoint REIT, Dicker Data, Cromwell Property Group, RAM Essential Property Fund and InvoCare.
The last big day of the season tomorrow brings updates from Harvey Norman, Adbri, Nickel Industries, Sandfire Resources, Swoop, Cooper Energy, McPherson’s and Tyro Payments.
Wednesday looms as the riskiest day of the Australian trading week as inflation and GDP reports drop simultaneously. The January inflation report is expected to show a modest dip in headline annual inflation to 8.1 per cent from 8.4 per cent in December. December-quarter GDP is expected to show solid growth of 0.7 per cent. Surprises in either report will have implications for interest rates and could therefore move the market.
The rest of the domestic economic calendar looks like this: quarterly company operating profits (today); weekly consumer confidence, monthly retail sales, current account and private sector credit (Tuesday); and monthly building approvals (Thursday).
Wall Street has a week of earnings from major retailers, including Target, Costco, Best Buy, Dollar Tree and Lowe’s. The economic calendar appears to hold fewer risk events than recent weeks. Possible highlights include: durable goods, home sales (tonight); consumer confidence (Tuesday); manufacturing PMI (Wednesday); jobless benefit claims (Thursday); and services PMI (Friday).
Back home, Select Harvests holds its AGM today. Pushpay has its annual meeting on Friday.
Dividend payments start to flow next month which means a slew of firms trade ex-dividend this week. Among the larger names going ex- are: Fortescue Metals, Santos, Beach Energy and Aurizon (today); Origin Energy, Amcor and Domino’s Pizza (Tuesday); AMP, Telstra and The Lottery Corporation (Wednesday); Woolworths, Coles, NIB and Medibank (Thursday); and Nine Entertainment, Ampol and Altium (Friday).
IPOs: the drought continues. The only company pencilled in for a possible listing this week is Tiger Tasman Minerals on Friday.
Commodities
Oil rose for the first time in eight sessions ahead of a reduction in Russian production this week. Moscow announced it will slash output by 500,000 barrels a day from March 1 in retaliation for western price caps.
Brent crude settled 95 US cents or 1.2 per cent higher at US$83.16 a barrel. The US benchmark firmed 1.2 per cent to US$76.32.
A strengthening US dollar weighed on precious and industrial metals. A stronger greenback increases the prices of dollar-denominated commodities for holders of other currencies.
Gold for April delivery sealed a fourth straight losing week with a decline on Friday of US$9.70 or 0.5 per cent to US$1,817.10 an ounce. Friday’s close was the yellow metal’s weakest since December 28. The NYSE Arca Gold Bugs Index eased 0.3 per cent.
“The evolving new narrative of more robust U.S. growth, payrolls, retail sales, and the additional Fed response required to tame the rude health of the U.S. economy sees investors catching up to the Fed ‘higher for longer,’ which has hurt gold,” Stephen Innes, managing partner of SPI Asset Management, wrote.
An increase in inventories in China helped push benchmark copper on the London Metal Exchange down 2.11 per cent to US$8,716.50 a tonne. Copper inventories in Shanghai warehouses increased by 1.1 per cent last week.
Aluminium on the LME dropped 2.53 per cent. Nickel declined 3.28 per cent, zinc 2.32 per cent and tin 1.99 per cent. Lead improved 0.73 per cent.
Iron ore retreated as a Chinese regulatory crackdown took some of the shine off a positive week. The most-traded May ore on the Dalian Commodity Exchange ended daytime trade 0.2 per cent lower at 909.50 yuan (US$131.19) a tonne. For the week, ore prices gained roughly 3 per cent.
BHP‘s US-traded depositary receipts slid 3.82 per cent. The miner’s UK listing gave up 3.5 per cent. Rio Tinto shed 3.62 per cent in the US and 2.9 per cent in the UK.
Recent pressure on battery metal miners resumed after a fleeting respite on Thursday. The Global X Lithium & Battery Tech ETF sagged 1.9 per cent on the New York Stock Exchange to a seven-week low.
