Evening Wrap: ASX 200 gives back early strength + Goldman Sachs sees three more rate hikes

 The S&P/ASX 200 closed 12 points lower, down -0.16%. 

Australian stocks finished lower and at worst levels amid weakness from banks and energy sectors, analysts are getting more hawkish on the RBA's interest rate outlook with many on the 4.85% terminal rate bandwagon, Australia's Q1 GDP growth was the slowest since Q3 2021 and why its worth paying attention to broker notes.

Let's dive in.

ASX 200 Session Chart

ASX 200 fades from session highs and closes at worst levels (Source: Market Index)

Markets

The ASX 200 finished lower, down from session highs of 0.5%. Weakness from banks, real estate and energy stocks offset the bounce for discretionary stocks and continued strength for tech. The market is recalibrating for 'higher for longer' after the RBA hiked rates again on Tuesday. Goldman Sachs is now expecting three more hikes with a terminal rate of 4.85%. The market remains choppy and very selective as to what gets to move.

Economy

Australia’s GDP rose 0.2% QoQ and 2.3% YoY in the first quarter of 2023.

• Below consensus expectations of 0.3% QoQ and 2.4% YoY

• “This is the sixth straight rise in quarterly GDP but the slowest growth since the COVID-19 Delta lockdowns in September quarter 2021." – Katherine Keenan, ABS Head of National Accounts

• “Spending on essential goods and services were the main contributors to the rise in household spending, while discretionary categories such as furnishing and household equipment, purchase of vehicles and other goods and services all detracted from growth.”

• Household saving to income ratio fell to 3.7%, the lowest level since Q2 2008

• Travel services exports have recovered to around 70% of pre-pandemic levels

Latest news

Market Insights: The Broker Effect

Broker notes can be questionable at times (mostly their share price targets). But the timing of broker notes is also very important.

Baby Bunting (ASX: BBN) shares tumbled 16.9% on Tuesday after a trading update flagged that "sales have been unprecedentedly low, with comparable store sales of around negative 21.0%."

"If this trend continues, the Company expects FY23 sales to be in range of $509 million to $513 million and comparable store sales to be negative 4.0% to negative 5.0%."

The magnitude of the trading update caught analysts by surprise. The general view was that Baby Bunting would be partially insulated from the weakness in discretionary spending due to the somewhat defensive nature of its product lines. This is clearly not the case.

Analysts were extremely bearish on the company's outlook and slashed their price targets, including:

• Ord Minnett: Lowered from $2.45 to $1.60

• Morgan Stanley: Lowered from $3.50 to $1.65

• Citi: Lowered from $2.40 to $1.10

• Macquarie: Lowered from $2.45 to $1.55

Even though the stock is technically oversold, it's struggling to muster up a bounce. It fell another 7.8% on Wednesday on 3.2 million volume (vs. 20-day average of 665,000). Investors clearly want none of it and that downward pressure is likely exacerbated by the sharp downgrades from brokers.

Interesting news and movers

Trading higher

• +19.1% Novonix (NVX) – JV with LG Energy

• +15.8% Polynovo (PNV) – Trading update

• +13.3% Estia Health (EHE) – Revised bid from Bain Capital

• +11.4% Andromeda Metals (ADN) – Offtake term sheet

• +6.3% Gascoyne (GCY) – Drill results

• +4.7% Block (SQ2) – Treasurers comment on digital payments

• +4.4% Austal (ASB) – Arlington interested in Austal (AFR)

• +3.3% Red5 (RED) – Gold production and guidance

• +2.7% Graincorp (GNC) – Grain price rally on Ukraine news

Trading lower

• -73.7% Pacific Edge (PEB) – Medicare coverage of Cxbladder tests in US ceases

• -7.8% Baby Bunting (BBN) – Multiple broker downgrades

• -8.1% Beach Energy (BPT) – Trigg 1 well plugged and abandoned

• -5.3% Adairs (ADH)

• -4.7% Incitec Pivot (IPL)

• -2.3% Champion Iron (CIA) – Quebec update

Broker notes

Macquarie’s take on consumer spending:

• “Macquarie High Frequency data indicates lower furniture spend in May-23, dropping to 2.4% of total spend, below the 3-year average of 3.3%.”

• “The average spend on home furniture in CY23 has been subdued, currently tracking marginally below the pre-COVID average of 2.7% despite price inflation.”

• “On average, shoppers spent $317 per transaction in the first three weeks of May-23. This is below the 3-year average of ~$334, albeit slightly above pre-COVID levels of $305.”

• “We continue to see macroeconomic headwinds for retailers. We have Neutral ratings on NCK, TPW, BBN.”

Citi’s take on Saudi oil production cut:

• “While OPEC’s leading producer had threatened surprise action against “speculators” who appeared to be bringing prices down, both 1H’23 supply vs. demand balances and the outlook for 2H’23 are turning out to be far weaker than market consensus had them. It was fundamentals that were driving prices down and money managers following the numbers.”

• “A surprisingly large number of analysts continue to see a significant surge in demand in 2H’23 extending into 2024, led by China and other EM countries, particularly in Asia. Citi’s view is now even more bearish demand for 2H’23 than it was at the start of the year.”

• “Saudi cut unlikely to raise oil prices into high $80s/low $90s: weak fundamentals point to lower prices by year-end.”

Citi’s take on iron ore prices:

• “There are good reasons behind iron ore’s recent strength as the market leans on hopes for stimulus after weak macro data prints and steel output cuts have been smaller than expected.”

• “We think the recent strength is unlikely to be sustained as effective stimulus measures will be difficult to achieve and a supply side response is also not our base case.”

• “We downgrade our 2Q’23, 3Q’23 and 4Q’23 forecasts to $110/t, $100/t and $90/t.”

Scans