Equities advanced on Tuesday following softer inflation data, with bond yields falling.
United States
The CPI report for November showed US inflation rose at 7.1% over the year, below forecasts of 7.3% and cooling from 7.7% in October. A core measure which excludes volatile items such as energy and food rose 6%, also modestly below forecasts of 6.1% with both measures below monthly estimates. While inflation remains uncomfortably above target, it is a lagging indicator and forward looking indicators continue to suggest a softening in economic growth that should cool prices further, adding to the case for the Federal Reserve to shortly pause rate increases at the January 2023 meeting. Analysts are cautious about celebrating the CPI results early, Richard Carter from Quilter Cheviot commented, “While the war against inflation is turning, we are a long way off declaring victory and the Fed will keep its hawkish stance for a while longer, even if it does potentially force a recession.” Attention now turns to the Federal Reserve policy decision overnight which will be accompanied by updated “dot plots” and a press conference by Jerome Powell who is expected to reiterate that policy needs to remain restrictive for some time in order to bring inflation down to target, pushing back against market pricing that suggests rate cuts are likely in late 2023.
Equities in the US closed higher on Tuesday, boosted by positive inflation data. The S&P500 was up by 0.73%, the Dow gained 0.30%, the Nasdaq 1.01% and the Russell 2000 0.76% with the VIX -9.80% lower at 22.55. The S&P500 initially jumped as much as 2.7% before paring gains, in line with the narrative of “buy the rumour, sell the fact” which softening inflation highly anticipated prior to the data release. Treasury yields were lower across the board with the 2-year rate down -15.1 basis points along with both the 10 and 30-year rates by -10.3.3 and -3.8 basis points respectively.
Europe
European equities were boosted by the softer US inflation data with the Euro Stoxx 600 up 1.25% along with the CAC 1.42%, DAX 1.34% and FTSE 1.37%. Investor focus will be on the UK inflation report, where the data is forecast to slowed over the year from 11.1% to 10.9% in November followed by interest rate decisions from both the ECB and BOE on Thursday. UK wage data on Tuesday showed a rise at a near record pace, maintaining pressure on the BOE to keep tightening policy. For the three months to October compared to a year earlier, wages rose 6.1%. Economists at Bloomberg noted “The latest batch of jobs data lifts the odds of another 75-basis point hike at the Bank of England’s meeting this week, though it’s probably not enough to tip the balance. Strong wage growth will embolden the hawks calling for a bigger rise”.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher on Wednesday, as futures were up 18 points or 0.25% to 7,177. The ASX 200 rose by 0.31% on Tuesday with eleven of the twelve sectors closing higher, with materials the only underperformer falling by -1.40%. Information technology leapt 1.70%, followed by industrials 1.55% and financials 1.42%. Miners were down due to declining iron ore prices. Fortescue Metals Group slumped -4.2, Rio Tinto lost -1.9% BHP was down by 1.5%. A downgrade from UBS on Sandfire Resources and Mineral Resources led to a decline in share prices by -4.1% and -3.8% respectively. Karoon Energy gained 1.8%, Ampol 0.9%, Chalice Mining lost -8.1. The Australian Securities and Investment Commission announced suing 11 Star Entertainment Group for failing to “sufficiently focus” on the risks of money laundering, in contrast the stock rose 0.4% suggesting such an outcome had already been priced in by investors. Data on Tuesday showed consumer confidence for December improved to 80 from 78 previously, however, remains deeply in pessimistic territory given cost pressures and sharp rate increases by the RBA suggesting that monetary policy is beginning to have the desired effect.
Commodities
Oil prices extended a recent bounce with both WTI and Brent crude up 3.01% and 3.40% to US$75.37 and US$80.64 a barrel respectively. In precious metals, spot gold climbed 1.73% to $1,812.33 and spot silver was up 1.82% to $23.74. Industrial metals were mixed with copper rising 1.18% to $384 while iron ore futures in Singapore weakened -0.47% on Tuesday and are a further -0.73% lower this morning at US$108.05. The price of bitcoin rose 4.3% to $17,751.
Economic Data:
- RBA RBA Gov Lowe Speech 09:30
- RBA Connolly Speech 14:50
- Chinese FDI (YoY Nov) 18:00
- UK Inflation (YoY Nov) 18:00
- Eurozone Industrial Production (YoY Oct) 21:00
- Fed Interest Rate Decision 06:00
- Fed Press Conference 06:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
