Evening Wrap: ASX 200 rallies ahead of US CPI data, Morgan Stanley Underweight on Pilbara Minerals

Iron ore miners pull the ASX 200 higher for a second straight session, NextDC shares surge on a positive trading update, Morgan Stanley initiates coverage of Pilbara Minerals with an Underweight rating and US inflation data is due tonight at 10:30 pm AEST.

Let's dive in.

ASX 200 Session Chart

ASX 200 rallies and closes a little off session highs (Source: Market Index)

Markets

Another strong day for the ASX 200, led by iron ore heavyweights. The market is now up 6.5% from March 20 lows, in a very V-shaped fashion. Intraday, the ASX 200 pulled back from session highs of 0.82%. We now turn our focus to the all-important inflation print and FOMC.

• Tech stocks led to the upside after NextDC (+8.1%) said it secured a record level of incremental customer contract wins since December 2022

• Materials continued rally strong after positive Chinese economic data on Tuesday, iron ore miners led the pack, which offset weakness from lithium

• Staples has been a surprising gainer, up 14 of the last 15 trading sessions

Economy

You know when you come back from a long weekend and forget that it's Tuesday? Well I accidentally skipped the Consumer and Business Confidence data from yesterday.

Australian Consumer Confidence jumped 9.4% in April to 85.8 from 78.5 in the previous month. Some key takeaways from the Westpac survey include:

• "This strong recovery in the Index can be largely attributed to the decision by the Board of the Reserve Bank to ... pause at the April meeting."

• "Confidence is now at its highest level since June 2022 although still 10.4% below April 2022, the month before the RBA Board began raising the cash rate."

• "Confidence in the outlook for House Prices has boomed. The national Index of House Price Expectations lifted by 16.7% to 130.31, only 2.8% below its level in April last year, just before the tightening cycle began."

Australian Business Confidence was -1 pt in March from -4 pts in the previous month.

• Business conditions eased to 16 pts in March, well above the long-run average. There were notable declines in mining and retail but all sectors remain well above averages

• "In terms of labour costs growth, the survey suggests a gradual easing has continued to occur over the past 8 months after a sharp peak in July of 2022."

• "Purchase cost growth, which reflects costs of materials and other non-labour inputs, has shown a much steeper decline."

Latest news

Market Insights: All things CPI

Everything you need for tonight's banger at 10:30 pm AEST.

• Headline inflation expected to ease to 5.2% from 6.0% in February

• Core inflation expected to rise to 5.6% from 5.5% in February

The focus for the CPI print will be:

• Core services inflation, which was up 7.3% year-on-year in February and continued to trend higher

• Shelter inflation, which is trending 8.1% year-on-year and continues to lag real-time housing data (by many months). Once shelter inflation begins to roll over, so should core CPI. But when?

Goldman Sachs provided its CPI scenario analysis which expects stocks to selloff on a hot reading.

Source: Bloomberg

At the same time, the previous Wraps have talked about the intense short positioning in the lead up to this CPI print (highest since November 2011). Does this impact price action?

Remember on 13 October 2022 when inflation came in scorching hot and the S&P 500 flopped as much as -2.4% and then closed 2.6% higher (or a 5.5% rally off session lows).

Or maybe we're thinking too much and we get something more like the recent January and February reading (in-line and slightly hotter than expected), and the S&P 500 was up 0.4% and 0.5% respectively.

Interesting news and movers

Trading higher

• +18.4% Calidus Resources (CAI) – Q3 update (Tue)

• +13.1% 29 Metals (29M) – Drilling update

• +8.1% NextDC (NXT) – Contract wins

• +7.7% Megaport (MP1) – NextDC peer rally

• Iron ore sector move: Champion Iron (+7.0%), Rio Tinto (+2.7%), BHP (+1.9%), Fortescue (+1.6%) 

Trading lower

• -4.8% Argosy Minerals (AGY)

• -4.5% OFX Group (OFX)

• -4.1% Global Lithium (GL1)

• -4.1% Pilbara Minerals (PLS) – Initiated Underweight at Morgan Stanley

• -3.2% Whitehaven Coal (WHC) – Downgrades FY23 outlook 

Broker updates

Morgan Stanley on lithium

• “We remain cautious on near-term Li demand and battery inventory de-stocking putting downward pressure on Li prices.”

• “As such we favour fully integrated producers, with a focus on volume growth and valuation to define our Li order of preference - AKE (Overweight), MIN (Equal-weight), IGO (Underweight) and PLS (Underweight).”

• “In an elevated pricing environment lithium producers were able to capture significant incremental margin through un-contracted volumes.”

• “However,as market supply expands and risks of inventory de- stocking in the downstream battery market increase, we see opportunities to capture additional margin through un-contracted tonnes coming under pressure as prices fall in the near-term making tolling margins turn negative.”

Morgan Stanley on Treasury Wine:

• “Removal of China tariffs creates upside risk to TWE earnings forecasts.”

• “In addition to EPS upside,a return to supplying the China market is also likely to have implications for the multiple on which TWE trades.”

• “TWE currently trades on a 12mth fwd P/E of 23x, which is in-line with mid-cycle multiples,however it's well short of the 27x it traded from 2016 through to 2018.”

• Reaffirmed an Overweight rating with a $15.40 target price

Scans