Morning Wrap: ASX 200 flat, S&P 500 gains on more easing inflation data

Major US benchmarks clinch on to a fourth winning day fuelled by cooler-than-expected inflation data from the US and UK, the market now expects no more Fed hikes and a first cut by May 2024, Target smashes expectations as inventory levels normalise, President Biden is due to meet Xi on Thursday and Morgan Stanley is out with its 2024 outlook for the ASX.

Let's dive in.

S&P 500 SESSION CHART

(Source: TradingView)

MARKETS

• S&P 500 edges higher, now up ~9.5% since 27 October

• S&P 500 less than 2.5% away from year-to-date high but more than half of its constituents are trading below the key 200-day moving average 

• Yesterday, 97% of the stocks in the S&P 600 closed higher, the best day in 12 years

• Markets rallying on the back of disinflation momentum, which underpins both the soft landing and peak Fed narratives

• Markets have completely priced out any tightening through to March, with the first rate cut to take place in May 2024 and additional cuts to 3.80% by November 2025

• Premature pivot expectations has been a major theme this year – Deutsche Bank says this tightening cycle has already seen six premature dovish pivots and the bond market has to date struggled to price in higher-for-longer 

• Goldilocks hopes return for stocks as US inflation falls more than expected (Reuters)

• Global bonds on course to erase 2023 loss as peak Fed gain momentum (Bloomberg)

• US dollar drops most in a year as market bets on end of US rate hikes (Bloomberg)

• Oil prices fall on a bigger-than-expected rise in U.S crude inventories (Reuters)

STOCKS

• Microsoft announces new chips that could compete with Nvidia's AI GPUs (CNBC)

• Citigroup begins layoffs as company undergoes business transformation (CNBC)

• SpaceX considering Starlink IPO as soon as 2024 (Bloomberg)

• JD.com tops earnings on price competitiveness and supply-chain advantages (CNBC)

KEY EARNINGS

Target (+17.8%): Double beat but Q3 comparable sales down 4.9% year-on-year, operating income margin rate was 5.2% (vs. 3.9% in 2022) reflecting lower markdowns, lower freight costs and favourable category mix. Key quotes from earnings include:

• "Declines in discretionary categories were partially offset by continued growth in frequency categories, most notably in Beauty.”

• "Inventory at the end of Q3 was 14 percent lower than last year, reflecting a 19 percent reduction in discretionary category inventory.”

• "Consumers are still spending, but pressures like higher interest rates, increased credit card debt and reduced savings rates have left them with less discretionary income, forcing them to make tradeoffs.”

CENTRAL BANKS

• BOJ's hawkish views suggest negative rates may end in 1Q24 (Reuters)

• China MLF operation sees biggest net liquidity injection since 2016 (Reuters)

• Villeroy says ECB confident inflation will return toward 2% target by 2025 (Bloomberg)

• Fed's Daly says recent data shows deceleration in inflation (FT)

GEOPOLITICS

• President Biden and Xi to meet Thursday in San Francisco (Reuters)

• Congressional report finds Chinese companies still buying US equipment for advance semiconductors despite new export rules (Reuters)

• Israel raids Gaza's Al Shifa Hospital, urges Hamas to surrender (FT)

• US averts government shutdown, House passes funding bill pushed by Speaker Johnson to keep spending at current levels until Jan-Feb (FT)

CHINA

• China retail sales, industrial data grow faster than expected in October (Reuters)

• China mulls $137bn of new funds to aid housing market (Bloomberg)

ECONOMY

• US producer prices unexpectedly fall in October (Reuters)

• US retail sales fell in October for the first time in seven months (CNN)

• Japan economy shrinks in Q3 on inflation and weak yen (Bloomberg)

• UK inflation marks bigger than expected drop on falling oil prices (FT)

• Eurozone industrial production posts seventh straight decline (Reuters)

• Australia wage price index flags record growth (Reuters)

Where Are We Now?

A little recap about the recent rally.

• S&P 500 is up almost 10% from its 27 October low

• First leg (about 75% of the rally) was mainly due to extreme oversold conditions. The 30 October Morning Wrap noted a few of these key indicators

• The second leg (or the last two days) rallied on the back of cooler-than-expected US inflation data. As former PIMCO Chief Economist Paul McCulley puts it "we're having a day of 'rational exuberance' because we're getting data we've been waiting for, for a long time."

• Current market expectations for Fed funds rate include a pause through to March 2024, the first cut by May 2024 and additional cuts to 3.80% by November 2025

Source: Charlie Bilello

• Disinflation momentum continued overnight with UK inflation easing to 4.6% in October from 6.7% in September and below market expectations of 4.8% as well as US producer prices unexpectedly falling 0.5% month-on-month in October vs. expectations of a 0.1% increase

Source: TradingEconomics

• After such a pronounced rally, indexes are getting a little extended and entering overbought territory. We may need a little time to digest the recent run up

• The big challenge here is that we've seen plenty of V-shaped rallies fizzle just as fast. So in the event of a pullback, let's see if we can get a calm and constructive one

Morgan Stanley's ASX Outlook

Morgan Stanley is out with its 2024 outlook for the Australian equity market, and to put it politely, it's not looking overly optimistic. Then again, that's what they said at the end of 2022 and it's not turned out as bad as feared. Here are some of their forecasts:

• Earnings growth expectations tracking 6% lower for FY24 but rebounding 6% in FY25

• Industrial stocks harbour the most earnings risk

• 12 month forecast dividend yield of 4.4% is now well below the historical average

• "An earnings multiple range of 14-16x seems fair, should 10 year bond yields stay in the forecast range of 3% to 5%," analysts wrote

• Mid-2024 ASX 200 target of 7,350 or 3.4% higher than Wednesday's close.

They continue to remain overweight on energy and healthcare, while underweight the banks and most metals/mining stocks. Amazingly, in their Macro+ Model Portfolio, the team's largest overweight is still cash.

Source: Morgan Stanley

The Macro+ Model Portfolio added Altium Limited (ASX: ALU) as a stock to watch. But removed a handful of names including:

• Ampol (ASX: ALD)

• Arena REIT (ASX: ARF)

• Bluescope Steel (ASX: BSL)

• IDP Education (ASX: IEL)

• Northern Star (ASX: NST)

• Region Group (ASX: RGN)

They also nominated their favourite and least favourite resource stocks.

• Top of the pile are South32 (ASX: S32) and Rio Tinto (ASX: RIO)

• At the bottom of the pile are Pilbara Minerals (ASX: PLS) and Fortescue (ASX: FMG)

ASX corporate actions occurring today:

• Trading ex-div: Copper Strike (CSE) – $0.02, ANZ (ANZ) – $0.94, Bisalloy (BIS) – $0.105, Orica (ORI) – $0.25

• Dividends paid: Bank of Queensland (BOQ) – $0.21, InvoCare (IVC) – $0.60, Myer (MYR) – $0.01 

• Listing: None

Economic calendar (AEDT):

• 10:50 am: Japan Balance of Trade

• 11:30 am: Australia Unemployment