Morning Wrap: ASX 200 to fall + Why iron ore prices are expected to weaken

The S&P 500 was breakeven while the Nasdaq extended its big tech rally, Nvidia's market cap briefly joins the US$1tn club, Biden and McCarthy announce a tentative deal to suspend the debt ceiling through to January 2025, Spanish inflation falls more than expected to 3.2%, the Fed is likely to hike by another 25 bps in June and why investors should brace for lower iron ore prices.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 fades from session highs to close at breakeven (Source: TradingView)

MARKETS

• S&P 500 finishes at breakeven from session highs of 0.61%

• Another session of narrow tech leadership, with the equal-weight S&P underperforming the benchmark 

• US 2-year yield falls 16 bps after rallying for 12 consecutive days 

• WTI crude tumbles 4.8%, below US$70 a barrel for the first time since 5 May

• US big tech rally expected to continue as investors favour growth (Bloomberg)

• Semis ETF SOX at 14-month highs on strong institutional demand for AI stocks (FT)

• AI enthusiasm has Nvidia trading at 25x forward sales vs 6x for SOX (Bloomberg)

• Tech rally left small-caps underperforming large-caps by most since 1997 (Yahoo)

• Debt ceiling deal brings looming liquidity drag with an estimated US$1tn in T-bill issuance over next seven months (Bloomberg)

• Chinese stocks enter bear market on slowing growth, geopolitical tensions (Bloomberg)

STOCKS

• Nvidia briefly joins the US$1tn market cap club (CNBC) 

• Tesla shares higher as Musk kicks off China visit (Reuters)

• Coinbase rallies after Atlantic Equities called it the “best expression of crypto (CNBC)

EARNINGS

• S&P 500 companies recorded their best performance relative to expectations for Q1 since Q4 2021, according to FactSet

• BofA’s Global Earnings Revision Ratio improved from 0.77 to 0.90 to reach the highest level in over a year

ECONOMY

• Biden and McCarthy working to woo lawmakers to pass debt ceiling bill (Bloomberg)

• US consumer confidence dips to six-month low, labor market views soften (Reuters)

• Spain inflation slows more than expected to two-year low in May (Bloomberg)

• Japan unemployment rate falls for first time in three months (Bloomberg)

• Australian building approvals hit lowest level in 11-years (Bloomberg)

Deeper Dive

The Fed: It's higher for longer alright

The hype around AI and US debt ceiling drama has taken our attention away from the Fed. So let's recap how things are looking:

• The odds of a 25 bp hike in June hit a high of 68.8% today

• However, the odds of a 50 bp hike remains at 0%.

• In July, there is a 25.6% chance of two 25 bp rate hikes

• There is only one rate cut expected in 2023, down from expectations of four a few weeks ago

Bank of America says there are "three conditions for a Fed hike: 1) Strong data, 2) a debt ceiling increase and 3) subdued regional bank stress ... arguably, we have checked all these conditions ... even if the Fed skips June, it will keep July in play."

Iron ore: Prices are expected to weaken

Commodity consultancy Mysteel says iron ore prices are expected to weaken due to:

• Lower major steel product prices due to limited production cuts, weakening demand and falling costs

• Lower demand for construction materials, with cement and concrete sales down 26.6% and 21% year-on-year respectively

• Eastern China to enter the rainy season in June, which will affect construction progress and hinder steel trading

Iron ore prices have seen several 7-10% rallies and dips in the past month but settled 5.1% lower on Tuesday at US$96.20 a tonne.

Singapore iron ore futures (Source: TradingView)

Australia's housing problem

It's not news that Australia has a housing affordability crisis. But what you may not know is the dire state of housing supply. New figures released yesterday demonstrated this part of the problem perfectly. Building approvals fell 8.1% in April. The year-on-year fall has now extended to 24%. That is, there are 24% less homebuilding projects being approved nationally this year than this time last year. Or put it this way, the number of dwelling approvals last month was the lowest since mid-2012.

Source: ABS

The building industry isn't immune to the challenges being faced in other parts of the economy. There is a massive labour shortage, input costs are (still) really expensive, and the rise in interest rates all affect the demand for housing.

But what is different about this industry is the number of migrants we are welcoming to fix said labour shortage. It's estimated Australia will welcome over 400,000 people this year to our shores. While that's great for long-run productivity and economic growth, it does put an even larger strain on our housing market.

No wonder Westpac's Matt Hassan believes "Australia’s housing correction is largely over".

Macquarie's Outperformed rated ... on a lot of things

I'm going to confess to you a secret - the daily influx of sell-side research into our inboxes is one of my favourite parts of the day. But rarely do I see an email like the one I got yesterday from Macquarie's sell-side team. They published not one but eight OUTPERFORM ratings. We don't have time to go through all eight but I did pick out a couple of favourite quotes from those notes.

• Macquarie reinitiated coverage of AUB Group (ASX: AUB), arguing the company is "executing well and industry conditions are support[ing the] earnings growth outlook."

• Coronado Global Resources (ASX: CRN) is being discussed as a M&A target, not least because of its earnings trajectory. "While met coal prices have retreated, CRN continues to generate strong FCF yields of ~30% in a spot price scenario."

• And in the fan favourite lithium space, Leo Lithium (ASX: LLL) recently completed a strategic placement with Ganfeng Lithium. And that's got analysts relieved. "The strategic placement with Ganfeng Lithium has removed any funding shortfall risk in our view during the final phases of project construction and production ramp up at Goulamina." (Yesterday, LLL hit an all-time high)

ASX corporate actions occurring today:

• Trading ex-div: Pengana International Equities (PIA) – $0.014 

• Dividends paid: Janus Henderson (JHG) – $0.58, Acrow (ACF) – $0.17, Autosports Group (ASG) – $0.09, Kelly Partners (KPG) – $0.004

• Listing: None

Economic calendar (AEST):

• 11:30 am: Australia’s Monthly CPI Indicator

• 11:30 am: China NBS Manufacturing PMI

• 10:00 pm: Germany Inflation

• 10:00 pm: India Q1 GDP

• 10:30 pm: Canada Q1 GDP 

• 12:00 am: US JOLTs Job Openings