Evening Wrap: ASX 200 flat, US inflation in focus + Why CSL and ResMed shares are tanking

The S&P/ASX 200 closed 3 points higher, up 0.04%. 

The ASX 200 inched higher for a sixth consecutive session, healthcare stocks take a hit by the rising popularity of a new class of weight loss drugs, Tabcorp revenue and gambling turnover take a hit in the first quarter, a few Goldman Sachs notes of interest plus how will the S&P 500 perform following the US inflation print tonight?

Let's dive in.

ASX 200 Session Chart

ASX 200 closes around breakeven (Source: Market Index)

Markets

The ASX 200 extends its win streak to six but it's starting to show signs of fatigue, closing just above breakeven from a session high of 0.34%. It was a relatively uneventful session, with Banks leading to the upside after a bit of sector wide weakness on Wednesday (due to BOQ's weaker-than-expected full-year results). Healthcare stocks underperformed by a wide margin in response to the rise of weight loss drugs, which might affect markets such as kidney disease (CSL), sleep apnea (Resmed) and respiratory care (Fisher & Paykel).

The all-important US inflation data will drop tonight at 10:30 pm AEDT. We'll go into more of that in the Deep Dive below.

Economy

No major economic announcements. 

Latest news

Tabcorp: Non-Discretionary Spend Takes a Hit

The consumer must be doing it rough if we're cutting back on gambling.

Tabcorp (ASX: TAH) shares fell 6.2% to a one-year low of 91.5 cents after a 1Q24 trading update which highlighted:

• Group revenue down 6.1%

• Wagering turnover down 0.9%, wagering and media revenue down 5.4%

• Digital wagering turnover up 1.0%, digital wagering revenue down 3.9%

What's surprising is how well discretionary names furniture with Nick Scali, electronics with JB Hi-Fi and clothing with Premier Investments have held up relative to Tabcorp.

Ruthless Obesity Drugs

Local healthcare heavyweights CSL (ASX: CSL), Fisher & Paykel (ASX: FPH) and ResMed (ASX: RMD) sold off 4-6% on Thursday after European weight loss drug developer Novo Nordisk halted its kidney disease treatment trial after analysis showed signs of success.

It's interesting to watch these local darlings fall victim to the potential headwinds caused by a weight loss drug. And what's more is how most fund managers have viewed ResMed as a dip buying opportunity.

The stock is now around 3% off its late September low. While ResMed might be a fundamentally sound business with a long-term track record of growth, I'm curious to see just how long the market can remain irrational. As well as the impact the drugs will have on various industries. (Maybe its real, maybe it's all hype).

It's US CPI Time

The all-important US inflation data will drop tonight at 10:30 pm AEDT. Here's what the street expects:

• Inflation ticks to 3.6% in September from 3.7% in August

• Inflation to rise 0.3% month-on-month in September, from 0.6% in August

• Core inflation falls to 4.1% in September from 4.3% in August

On Wednesday night, we witnessed PPI and Core PPI inflation come in significantly higher than expected (PPI accelerated to 2.2% in September from 2.0% in August and well above the 1.6% expected). Producer prices accelerated due to the recent spike in energy prices and still-sticky service inflation.

It's time for a customary CPI tradition: the JPMorgan scenario analysis. (The logic is sound but the S&P 500 movements and probabilities tend to be very inaccurate)

• 5% probability – Headline MoM prints above 0.6%: This tail-risk outcome would ignite fears of a 1970s style inflation "wave" whereby we would begin another significant upswing in inflation data ... this would likely increase the probability of hikes for both November and December and reduce cuts from the 2024 forecast. S&P 500 loses 1.5% to 2.0%

• 27.5% probability – Between 0.4% to 0.6%: While not as extreme of an outcome as above, the bond market would likely price in a more hawkish Fed, potentially taking terminal rate to 6.0% ... the risk is that a more active Fed increases the probability that something breaks ... the magnitude of the market's move in response to a hawkish print also depends on which CPI component surprise to the upside ... S&P 500 loses 0.75% to 1.25%

• 45% probability – Prints in-line with consensus of 0.3%: This would be a positive outcome that would likely keep stocks on their current trajectory ... higher ... A print like this is not quite Goldilocks, but it is close, keeping Fed hiking expectations at "none-and-done". This would support for the growth without inflation narrative ... S&P 500 adds 0.4% to 0.75%

• 20% probability – Between 0.2% to 0.3%: This would be the largest MoM decline of the year and the third largest since the hiking cycle commenced. This would be the Goldilocks scenario. S&P 500 adds 1.0% to 1.5%

• 2.5% probability – Prints below 0.2%: ... the Fed would be seemingly closer to declaring "Mission Accomplished" ... Printing below those averages may change the narrative on sticky inflation, which would likely pull bond yields lower and support stocks. S&P 500 adds 1.5% to 2.0%

Interesting news and movers

Trading higher

• +30.4% Redbubble (RBL) – Trading update

• +3.4% Breville Group (BRG) – Goldman Sachs upgrade

Trading lower

• -6.3% CSL (CSL) – Presents study data

• -6.2% Tabcorp (TAH) – Q1 trading update

Broker notes

A few Goldman Sachs notes of interest.

Bank of Queensland (BOQ) – Sell with $5.15 target price ($5.35 at 11 Oct close) 

• “BOQ’s FY23 cash earnings of A$453m were down -8.4% on pcp and 1%/3% lower than GSe/Visible Alpha consensus.”

• “While the company’s transformation program is the right long-term strategy to deliver a strong and simpler bank, we believe it does leave the bank more exposed to inflation in non-staff costs.”

• “BOQ’s volume momentum remains weak, and while this is partly due to management’s efforts to protect profitability, BOQ’s FY23/2H23 NIM fell materially.”

Breville Group (BRG) – Upgrade to Buy with $24.50 target ($22.23 at 11 Oct close)

• “We have been structurally positive on BRG’s unique positioning in global coffee premiumisation trend and its establishment of a global high-end appliance brand backed by unique innovation.”

• “Our recent trip to the GS Global retail conference suggests a more resilient US consumer.”

• “We believe that the earnings slow-down post COVID will not be as steep as market expects and believe a consistent delivery of double digit EPS growth will drive re-rating.”’

UBS on fuel demand:

• “Rising board prices for petrol >A$2/L due to higher crude prices and the falling AUD has resulted in some pressures emerging in retail fuel demand in our view.”

• “Industry feedback supports the view that when petrol board prices are sustained >A$2/L it has historically translated to smaller fills at the bowser.”

• “We estimate that the post-COVID rebound in retail fuels is largely complete, therefore higher board prices and increasing cost of living pressures will result in softer growth in retail fuel demand for ALD and VEA than we had forecast prior.”

Scans