Evening Wrap: ASX 200 reverses early losses, iron ore miners rally, Australia's inflation eases

The S&P/ASX 200 closed 7 points lower, down -0.1%.

The local sharemarket rallied off session lows of -0.58%, Australia's economy slows in Q4 but inflation data was cooler-than-expected and China's factory activity surprises with the fastest growth in a decade.

Let's dive in.

ASX 200 Session Chart

A positive inflation print at 11:30 am AEDT helps the ASX 200 surge from session lows of -0.58% to close around breakeven (Source: TradingView)

Markets

The market reversed off session lows thanks to positive economic data including cooler-than-expected inflation (7.4% in January vs. estimates of 8.1%) and stronger-than-expected PMIs from China. The inflation print helped take some heat out of bond yields, with the 3-year down 13 bps to 3.51%.

• Materials and Energy rallied after China's manufacturing PMIs unexpectedly surged to levels not seen since April 2012

• Defensive sectors and banks led to the downside

Economy

Australia’s GDP growth rate decelerated to 0.5% in the December quarter from 0.7% in the previous quarter. 

• Missed consensus estimates of 0.6%

• "The 0.4 per cent rise in total consumption and 1.1 per cent rise in exports were the primary contributors to GDP growth in the December quarter. Continued growth in household and government spending drove the rise in consumption, while increased exports of travel services and continued overseas demand for coal and mineral ores drove exports.” - Katherine Keenan, ABS Head of National Accounts

Australia’s inflation rate eased to 7.4% year-on-year in January from 8.4% last December.

• Beat economist expectations of 8.1%

• Still the second highest annual increase since the start of monthly CPI indicator series in 2018 

• Housing, Food and non-alcoholic beverages and Recreation were the main contributors, up 9.8%, 8.2% and 10.2% respectively

China’s manufacturing PMI jumped to 52.6 in February from 50.1 in January.

• The 50-point mark separates expansion and contraction in activity

• Beat analyst expectations of 50.05

• The highest reading since April 2012

• Services PMI also beat expectations, accelerating to 56.3 in January from 54.4

Latest news

Market Insights

China's massive liquidity injection

China is pumping a record amount of liquidity into its financial system. Local banks extended 4.9 trillion yuan (US$710bn) in new loans in January 2023, up from 1.40 trillion in the previous month.

Source: TradingEconomics

The other thing to note from this is that Chinese PMIs are tightly correlated with the US ISM manufacturing Index. If the correlation hold, then the US ISM could soon begin to bottom.

Source: BEA

The correlation matters because the ISM has been the best coincident indicator of a bottom for equity markets, according to the Bureau of Economic Analysis.

Source: BEA

Interesting news and movers

Trading higher

• +11.3% Hastings Resources (HAS)

• +10.9% Base Resources (BSE)

• +8.0% Baby Bunting (BBN)

• +8.3% Arafura (ARU) – Bounce after -12% in previous three

• +5.7% Strike Energy (STX) – Up 13% in previous three

• +4.4% Aeris Resources (AIS) – Bounce after -22.8% in previous three

• +1.0% Pilbara Minerals (PLS) – $250m block trade at $4.10 pre-market 28 Feb

Trading lower 

• -9.1% Cooper Energy (COE) – 1H earnings (Tuesday)

• -5.7% Link Administration (LNK) – Trading ex-div

• -5.4% SiteMinder (SDR)

• -5.3% Polynovo (PNV)

• -3.8% Strandline Resources (STA) – 1H earnings

• -3.3% Tyro Payments (TYR) - 1H earnings (Tuesday)

Broker updates 

Goldman’s view on recent earnings: 

Harvey Norman (HVN): Buy with $4.70 target price

• 1H23 results missed Goldman revenue and net profit expectations by 3.4% and 6.3% respectively

• Australian Franchise Operations was viewed as a key miss with a softer-than-expected second quarter (like-for-like sales down -5.1%)

• Remain Buy rated as property valuation of $3.3bn represents ~70% of market cap and trades at a much cheaper valuation relative to JB Hi-Fi

NextDC (NXT): Buy with $13.30 target price

• “Although contracted growth was marginally softer than GSe, NXT clearly expects to sign meaningful new contracts imminently, and has accelerated 10MW of S3 capacity.”

• 2H23 guidance implies an acceleration in revenue but sequential decline in EBITDA due to increased land holding and power costs

PointsBet (PBH): Neutral with $1.62 target price

• Normalised EBITDA of -$149.1m was largely in-line with Goldman Sachs estimates

• Management flagged that Australia’s wagering industry remained weak into early 2H23, in-line with commentary from Tabcorp

• “While the balance sheet is currently cash positive, we expect cash burn to result in capital requirements in 2025 or on the flipside, lower marketing capacity and slower growth in the interim.”

Sandfire (SFR): Outperform with $7.00 target price

• 1H23 results was broadly in-line with estimates, cash flow metrics were previously disclosed 

• “Guidance ranges for MATSA remain unchanged with the mine expected to deliver stronger output in 2HFY23.”

• “The Motheo project is on track for first production in 4QFY23 and presents a

• key near-term catalyst for SFR.”

Tyro Payments (TYR): Neutral with $1.70 target price

• 1H23 result was in-line with pre-reported figures

• “TYR appears on track for FY23 guidance, but attention will quickly shift to FY24. Concerns around weaker economic activity and downside risk to FY24 earnings expectations limit the potential for outperformance.”

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