Yawn
The ASX200 jumped up 35 points on the open but quickly settled back to do not much all day ahead of last night’s Fed meeting. There were nevertheless some notable sector moves in either direction to cancel each other out.
On a glimmer of hope China might be rethinking zero-covid, and the prospect of the LME banning Russian metal trade, commodity prices shot up overnight. Our energy and material sectors each rose 1.1%.
Bond yields moved up again nonetheless, with the ten-year gaining 5 points to 3.80% and the two-year 8 points to 3.26%.
Real estate fell -1.6%, technology -1.3% and communication services -0.7%. The banks remained flat, with the RBA hike full pass-throughs underway, while funnily enough staples fell -0.7% and discretionary rose 0.2%.
The winners table for the ASX300 was once again dominated by miners, although Perpetual Ltd (ASX:PPT) was a surprise number four on 5.5% and that trade will probably be regretted today.
A miner also topped the losers table, but only following a capital raising announcement. Australian Strategic Materials Ltd (ASX:ASM), which is quite heavily shorted, fell -8.6%.
Domino's Pizza Enterprises Ltd (ASX:DMP) was next with a -5.3% fall, after bemoaning the impact of inflation at its AGM.
In economic news, building approvals fell -5.8% in September from August and are down -13.0% year on year, when economists had forecast -10%. It’s a double-whammy for new buildings – the higher cost of finance and the inflated cost of wood, steel and other materials.
The value of new housing loan commitments fell -8.2% in September having fallen -3.4% in August.
Owner-occupier loans fell -9.3% but are still 23.2% higher in value than pre-pandemic. Investor loans fell -6.0% but are still 59.8% higher.
Investors were right to remain subdued ahead of the Fed meeting, the impact of which has our futures down -113 points this morning.
Very Premature
The Fed hiked by 75 points and no one was surprised. That takes the Fed funds rate to 3.75-4.00%. But there was some excitement on the initial release of the statement.
In it Jerome Powell acknowledged the lag effect of rate hikes on the economy, and the impact cumulative rate hikes would have. In other words he hinted it might be time to slow down, or even pause, to allow the economy to catch up.
US stocks shot up and bond yields and the US dollar shot down.
But in echoes of Jackson Hole, the tone of Jerome Powell’s press conference was much different. He didn’t quite have steam coming out of his ears this time, but the song remains the same: there’s still “a ways to go” to control inflation. It would be “very premature” to foresee a pause in rate hikes at this stage.
Stocks crashed and bond yields and the dollar shot back up. The ten-year yield initially fell below 4.0% before closing up 3 points to 4.09%. The two year closed up 7 points to 4.62%. The dollar index is up 0.5%.
Powell implied that policy risk is binary. If the Fed pauses too early, the risk is inflation expectations become “unanchored” and a seventies-style wage-price spiral follows, leading the US into a deep and dark seventies-style recession. And the Fed would have go back in, hard, again.
If the Fed goes too hard and too far there is also a risk of recession, but the Fed can respond with various measures, such as stopping QT or cutting rates once more.
Hence the latter is the safer risk.
As to how far the Fed is prepared to go, well Powell suggested the terminal rate – where the Fed will stop – could yet be higher than the rate implied by the FOMC forecasts at the last meeting in September (dot plots).
As to how quickly the Fed will get there – well, this is maybe where we could see a slowing of the pace. Powell did nothing to upset the expectation December could bring only a 50 point hike, and even 25s thereafter, but the hikes will keep on coming at whatever quantum until the Fed is satisfied. And there the rate will stay put for as long as it takes to bring inflation back down under 3% (core PCE).
The RBA is in the same mindset. The Australian market was thrilled when October brought only a 25 point hike and not another 50, and thrilled again when Cup Day brought the same. But this is not to imply the RBA is ready to pause – it just wants to slow down so that the impact on the economy is less fierce and more incremental. There is not yet light at the end of the tunnel.
Last night’s US private sector jobs number was unhelpful, showing 239,000 jobs added in October when 195,000 were forecast. Wall Street will be praying for a non-farm payrolls number under 200,000 tomorrow night.
Which highlights that despite its bravado, the Fed will remain data-dependent. There will be another jobs number and two more CPI reads (and one PCE) before the December meeting.
Commodities
Not a lot to see here. We are reminded that the LME closes just as the Fed statement is being released, so we need to wait until tonight to see a response.
The apparent -US$10 drop in the iron ore futures price will be a front-month rollover, implying a steep backwardation, and indeed iron ore was up 2% yesterday.
On the greenback jump the Aussie is down -0.6% at US$0.6356.
Today
The SPI Overnight closed down -113 points or -1.6%.
Locally we’ll see the September trade balance today.
Japan is closed.
The Bank of England meets tonight.
The US will also see trade numbers as well as factory orders.
October services PMIs are out across the globe today.
There are several companies holding AGMs today.
Woolworths ((WOW)) reports quarterly sales.