Morning Wrap: ASX set for flat open, all eyes on RBA interest rate decision

Wall Street was closed for the Fourth of July public holiday, major European indices rallied - headlined by oil and gas stocks, iron ore continues to tank and the RBA is expected to deliver another interest rate hike at 2:30 pm AEST.

Let’s dive in. 

Markets

The US market was closed on Monday in observance of Independence Day. We will reluctantly turn to the next best alternative: European markets.

Most European sectors traded in positive territory. Energy stocks outperformed while the tech sector fell short of benchmarks.

• Regional Stoxx 600 +0.5%

• London’s FTSE 100 +0.9%

• German DAX -0.31%

• France's CAC 40 +0.4%

Stocks

• Harbour Energy, Shell and BP all rose 4-5% amid a broad-based rally for energy stocks

• Uniper (-27%) shares tanked after reports that the German government is considering a state bailout of the utilities company. Uniper is struggling due to reduced Russian gas imports

• Strategists at Liberum said economic data indicates a -25% drop in earnings per share over the next 12 months for European companies, Reuters reported 

Economy

• Eurozone inflation hit a record 8.6% year-on-year in June

  • Up from 8.1% in April and above economist estimates of 8.4%

  • France and Spain experienced much higher inflation in June

  • German inflation declined, but largely due to new government energy subsidies

  • Stagflation risks in the EU remain very real 

• Eurozone producer prices rose 0.7% month-on-month in May

  • Producer prices are up 36.3% compared to a year ago

  • Slightly below economist expectations of 36.9% 

• Germany recorded its first trade deficit in more than 30 years, at -1bn euros

  • Exports were down -0.5% month-on-month contributing to the deficit

  • Germany’s dominant manufacturing position was hit by supply chain related disruptions caused by the Russia-Ukraine war, pandemic and Chinese lockdowns

  • Prices for imports such as energy, food and industrial components have surged by more than 30%

• Swiss inflation hit a 29-year high of 3.4% year-on-year

  • The last time Swiss inflation was above 3% was in 2008 

• US Atlanta Fed’s ‘GDP Now’ forecast slid to an annualised -2.1% in the second quarter

  • Implies the US is already in a technical recession (2 consecutive quarters of negative GDP growth) 

Commodities

• Iron ore prices continue to slide amid limited demand from steelmakers and downbeat market sentiment, sources told Fastmarkets 

• Oil continues to bounce on data showing lower output from OPEC members, unrest in Libya, sanctions on Russia and an oil and gas strike in Norway

• Gold remains largely unchanged around US$1,805 ahead of the Fed’s June meeting on Thursday

The S&P/ASX 200 is expected to open flat on Tuesday as the market braces itself for higher interest rates.

Consensus expects the RBA to deliver a 50 bps hike to bring the cash rate to 1.35%.

A 25 or 75 bp hike is possible, but highly unlikely.

How the ASX might respond to the rate hike

The RBA has delivered two larger-than-expected interest rate hikes this year.

• May: 25 bps to 0.35% (vs. estimates of 15 bps)

• June: 50 bps to 0.85% (vs. estimates of 25 bps)

Both times, the ASX 200 sold off sharply.

XJO 3-minute chart on 3 May (Source: TradingView)

XJO 3-minute chart on 7 June (Source: TradingView)

75 bps is unlikely, but still possible. Recent solid economic data could embolden the RBA and suggest to them that the Australian economy can stomach higher interest rates.

Retail spending rose for a fifth consecutive month in May, job ads are abundant, manufacturing PMIs are steady and unemployment is sitting at all-time lows of 3.9%.

ASX corporate actions occurring today:

• Ex-dividend: ALG, CAM, EDC 

• Dividends paid: CIM, IPL, NAB

• Listing: None

• Issued shares: 8IH, AHX, AIM, AIS, ALQ, AMA, AON, ATV, BRG, C29, CAE, CAT, CCG, CD1, CD2, CNI, ELO, EM2, EMH, EOS, FLX, FWD, INR, JLG, KAT, LIT, LKY, MCP, MGF, MGU, MND, MQG, MSV, NAB, NBI, NIS, NSX, NTU, OIL

Other things of interest (AEST): 

• Australia Retail Sales (May) at 11:30 am 

• China Caixin Services PMI (June) at 11:45 am

• RBA Interest Rate Decision at 2:30 pm