The ASX is likely to slip this morning after the ASX 200 added 34 points (0.47%) yesterday to close at 7,344.
The ASX 200 points to a flat open this morning at 7,340 (-0.05%).
Yesterday’s gains were led by IT (+1.44%) and the Materials (+1.42%) sectors, while the Utilities (-0.41%) and the Energy (-0.34%) sectors were the weakest.
IG markets analyst Tony Sycamore highlighted the local market’s April strength but said it may not last.
“After holding support at 6,900, the ASX 200 reached the 7,350 target we first pinpointed on March 28 for a gain of ~4.5% in just nine trading sessions. April (at least in the first half) has again lived up to its reputation as one of the best months of the year for the ASX 200. (The average gain in April over the past 10 years has been +2.65%).
“While we wouldn’t rule out further gains into the end of April, particularly if the 7,350/70 resistance band breaks, keep in mind that May and June are seasonally two months with negative performance, which typically sees a pullback in the vicinity of 3-5%.”
A slow day today would follow a fall on Wall St overnight.
While US inflation is now at its lowest level in nearly two years - equity markets didn’t respond kindly, especially after the Federal Reserve hinted at a mild recession as financial markets continue to price in rate cuts.
Fed economists stated, “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
With that in mind, one Fed board member argued for a pause on rates.
“Several participants noted that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting.”
However, if not for the banking crisis the minutes suggest there would have been a 50 basis point hike.
“Some participants noted that given persistently high inflation and the strength of the recent economic data, they would have considered a 50 basis point increase in the target range to have been appropriate at this meeting in the absence of the recent developments in the banking sector.”
The banking crisis did cause the Fed to lower its range of what would be considered sufficiently restrictive, which will certainly impact rates moving forward.
Despite the uncertainty, the CPI figures did present good news. Sycamore said, “Breaking down the core index into its main components, core goods prices increased 0.2%, the firmest since last August, while core services decelerated to 0.45%, the slowest since July.
“The softness in services was driven primarily by a softening in shelter inflation from 0.8% to 0.6% last month. Looking ahead, attention turns to PPI, and Jobless claims tonight before bank earnings and retail sales tomorrow.”
Here’s what we saw (source Commsec):
- US sharemarkets eased on Wednesday. Shares in American Airlines fell 9.2% after it forecast a lower-than-expected first quarter profit. The Dow Jones index fell by 38 points or 0.1%. The S&P 500 index fell by 0.4%. And the Nasdaq index fell by 102.5 points or 0.9%.
- European sharemarkets firmed as investors digested US inflation data. Real estate shares rose 1.1% but travel and leisure fell 2% and technology lost 0.9%. Shares in Merck fell 7.4% after Reuters reported that the US health regulator paused the initiation of new patients on the company's evobrutinib drug.
- The continent-wide FTSEurofirst 300 index rose by 0.1% and the UK FTSE 100 index rose by 0.5%. Another measure of blue-chip stocks - the STOXX 50 index - hit 22-year highs during the session.
- Major currencies were firmer against the US dollar in European and US trade.
- The Euro rose from US$1.0915 to near US$1.1000 and was near US$1.0990.
- The Aussie dollar moved from US66.50 cents to US67.20 cents and was near US66.90 cents.
- The Japanese yen shifted from 133.96 yen per US dollar to JPY132.75 and was near JPY133.20.
- Global oil prices rose by near 2%. Investors were hopeful that a lower-than-expected US inflation reading could mean a pause in the Federal Reserve rate-hiking cycle. Investors shrugged off data showing a small rise in US crude stocks in the past week.
- The Brent crude oil price rose by US$1.72 or 2.0% to US$87.33 a barrel.
- The US Nymex crude oil price rose by US$1.73 or 2.1% to US$83.26 a barrel.
- Base metal prices were firmer. The copper futures rose by 1.5% while aluminium futures rose by 0.9%.
- The gold futures price rose by US$5.90 or 0.3% to US$2,024.90 an ounce. Spot gold was trading near US$2,014 an ounce at the US close. Iron ore futures fell by US55 cents or 0.5% to US$120.50 a tonne.
RBA admits to mistakes
Reserve Bank of Australia (RBA) officials have admitted to doing a “terrible job” in the wake of the pandemic.
Yesterday the RBA said it was struggling to curb inflation and its monetary settings reflected an “excessively cautious” approach, while the messaging around it was ineffective.
RBA board member Ian Harper told a panel in Melbourne that looking back “with the benefit of hindsight … it looks like we did a terrible job”.
“When you look backwards, often times you see things much more clearly than you do at the time,” he said.
Harper admitted to the RBA’s difficulty in balancing the dual mandate of being responsible for the stability of the Australian financial system and keeping inflation within its target 2-3%.
“Both of those things led us to be extremely cautious. With hindsight, excessively cautious in how we set interest rates during that time,” he said.
Deputy governor Michele Bullock described the messaging as “garbled”.
The 2021 message: “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The board does not expect these conditions to be met until 2024 at the earliest.”
That message has caused mortgage holders who believed there would be no hikes until 2024 a great deal of pain.
In May 2022, the RBA set out on a path of aggressive rate hikes and has only just hit the brakes after 10 rises in a row.
The official cash rate is now 3.6% and is expected to rise again.
The backlash against the RBA has been strong and Bullock admits the RBA got things wrong.
“I will accept … that the message got garbled. People latch on to a date … and even now that we are raising interest rates, they still want us to put a date on when we are going to stop doing it,” she said.
“We should have resisted … a little bit more there.”
That’s cold comfort to mortgage holders in distress.
According to the IMF’s World Economic Outlook, Australia is facing the second-highest risk in the developed world – falling just behind Canada – of home loan defaults.
“Economies with high levels of household debt and a large share of debt issued at floating rates are more exposed to higher mortgage payments, with a greater risk of experiencing a wave of defaults,” the IMF said.
The IMF cautioned the world economy was “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner”.