Morning Wrap: S&P 500 fades easing inflation fueled gains, gold soars, ASX to rise

ASX Futures (SPI 200) imply the ASX 200 will open 16 points higher, up 0.22%.

Major US benchmarks sold off from session highs despite a cooler-than-expected inflation report, both the US dollar and bond yields fell sharply, gold rallied to a near six month high and all eyes on the Fed's interest rate decision on Thursday at 6:00 am AEDT.

Let's dive in.

MARKETS

Major US benchmarks briefly rallied on a much cooler-than-expected inflation print but the way they faded was rather vicious.

• Session highs for benchmarks include S&P 500 (+2.77%), Dow (+2.08%) and Nasdaq Composite (+3.84%)

• Bond yields sold off sharply, with the US 2 and 10-year Treasury yields down -3.2% and -2.5% respectively

• US dollar index fell -0.9% to a near six month low

• Market pricing for peak fed funds rate fell around 10 percentage points to below 4.90% after the inflation print

• Real Estate led to the upside thanks to a big drop in bond yields

• Energy and Materials trailed closely behind thanks to a bounce in oil prices and weaker US dollar

• 64% of stocks advanced

• 45% of stocks trade below their 200-day moving average (47% on Tuesday, 47% a week ago) 

STOCKS

Moderna (+20.4%) announced that its experimental melanoma vaccine combined with Merck’s cancer treatment Keytruda cut the risk of skin cancer recurrence or death by 44%

• "... the data is so strong, for me it’s a Covid-like moment.” - CEO Stephane Bancel

Oracle (-1.4%) posted better-than-expected second quarter results thanks to a jump in cloud infrastructure revenues. The software company provided a light guidance, weighed by foreign-exchange rates.

• "In Q2, Oracle’s total revenue grew 25% in constant currency—exceeding the high end of our guidance by more than $200 million...powered by our infrastructure and applications cloud businesses that grew 59% and 45% respectively, in constant currency.” - CEO Larry Ellison 

United Airlines (-7.1%) announced the largest widebody order by a US carrier in commercial aviation history: 100 Boeing 787 Dreamliners with options to purchase 100 more.

•  "... the 737 MAX & 787 will help United accelerate its fleet modernization & global growth strategy.” - Boeing CEO Dave Calhoun

WORLD NEWS

• Bond traders bet on recession level plunge in inflation (Bloomberg)

• JP Morgan's Kolanovic sees downside risk for stocks in Q1 (Bloomberg)

• China ready to unveil 1 trillion yuan package for its semiconductor industry (Reuters)

• China hits back at US chip sanctions with WTO dispute (FT)

• FTX founder SBF arrested in Bahamas after US files criminal charge (NY Times)

ECONOMY

US inflation eased to 7.1% in November from 7.7% in October. 

• Beat analyst expectations of 7.3%

• Smallest increase since December 2021

• Shelter was the largest contributor to the monthly increase (+0.6% MoM, +7.1% YoY), more than offsetting decreases in energy (-1.6% MoM, +13.1% YoY)

• Food index rose 0.5% MoM and up 10.6% YoY

US core inflation fell to 6.0% in November from 6.3% in October. 

• Beat analyst expectations of 6.0% 

COMMODITIES

Iron ore futures fell -0.3% to US$108.20 a tonne.

Oil prices bounced around 3.0%, up close to 6.0% in the last two sessions. 

• “Crude prices got a boost from a cool inflation report that supports the case that the US economy could still have a soft landing. The oil market can’t justify prices below the $70 level even if bumpy times are ahead.” - Oanda senior market analyst, Ed Moya 

• OPEC’s monthly oil report left its world oil demand forecast unchanged for 2022 (2.5 million barrels a day) and 2023 (2.2 million barrels a day)

• “The year 2023 is expected to remain surrounded by many uncertainties, mandating vigilance and caution.” - OPEC 

Gold prices got a massive boost from the cooler-than-expected inflation report. 

QUICK BITES

• Highly paid guessers: Economists have an abysmal record for US inflation estimates.

• Another highly paid guesser: Likewise, the Fed always underestimates the eventual pain in labour markets. Will this time be any different?

• Current US rate expectations: 50 bps to 4.25% - 4.50% tomorrow, 25 bps to 4.50% - 4.75% in February 2023 and 25 bps to 4.75% - 5.00% in March 2023, followed by a pause and cuts from November 2023 onwards.

That's not the kind of price action you'd want to see following a bullish cooler-than-expected inflation print which validates the 'peak inflation' narrative.

Interestingly, the S&P 500 continues to respect the downward trendline.

S&P 500 chart (Source: TradingView)

Nevertheless, that's one massive catalyst done. One and a half to go. At 6:00 am AEDT on Thursday, we have the Fed's interest rate decision, where consensus expects a 50 bp rate hike. This will be followed by the Fed's presser at 6:30 am, where the market will be looking for clues as to what the Fed has in stall for 2023.

The ASX 200 is set to open +0.22% but the way the US markets faded puts us in a rather awkward position. Could this negative momentum drag our markets lower in early trade?

Sectors to watch

Real estate: A decline in bond yields could see positive flow for the rate sensitive real estate sector. It was also the best performing sector on the S&P 500.

Energy: Oil prices are up around 5.0% in the last two sessions.

Gold: Gold got its groove back thanks to the cool inflation report. Most gold miners have been trading sideways for the past 1-2 weeks after a massive run up. Does the jump in gold overnight reignite the rally?

Gold spot (Source: TradingView)

Stocks going ex-dividend over the next week:

• Wed: None

• Thu: Plato Income Maximiser (PL8) 

• Fri: None

• Mon: None

• Tue: Metcash (MTS) 

ASX corporate actions occurring today:

• Dividends paid: National Australia Bank (NAB), Graincorp (GNC), Infratil (IFT), Oceania Healthcare (OCA) 

•  Listing: None

Economic calendar:

• 9:30 am: RBA Gov Lowe speech

• 6:00 pm : UK inflation

• 6:00 am: Fed interest rate decision

• 6:30 am: Fed press conference