Morning Wrap: S&P 500 relief rally, US inflation slows to 6.0%, ASX 200 set to bounce

ASX 200 futures are trading 67 points higher, up 0.95% as of 8:20 am AEDT.

The S&P 500 snaps a five day losing streak, US headline inflation eases to 6.0% in February and in-line with consensus expectations, United Airlines observes 'new seasonal demand patterns' and oil prices tumble to 3-month lows.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 opens 1% higher, hits session lows of 0.46% but recovers to close near session highs (Source: TradingView)  

MARKETS

• A choppy relief rally with major US benchmarks bouncing towards close, all sectors higher and banks mostly higher after Tuesday's selloff

• US 2-year Treasury yield bounced 26 bps to 4.25% after falling 109 bps in the previous three sessions

• Financials have lost US$465B in market value in two days (Bloomberg)

• Hedge fund short covering contributing towards Treasury volatility on Tuesday (FT)

• Collapse in bond yields signals global tightening cycle is over (Bloomberg)

• Fed rate path uncertain given mandate to maintain financial system stability (Bloomberg)

STOCKS

• Major banks inundated with customer requests to transfer funds from smaller lenders (FT)

• First Republic CEO says bank not seeing massive withdrawals (CNBC)

• First Republic Bank and five other US lenders on review for Moody's rating downgrade after SVB fall (Bloomberg)

• Regional banks could be forced to seek private capital injections (Reuters)

• Meta to launch another round of 10,000 job cuts this week (FT)

• VW commits €180B over next five years to manufacture its own batteries (FT)

EARNINGS

United Airlines (-5.4%) guided to a first-quarter loss due to weaker demand growth and higher fuel costs. 

• "While all months of 2023 are expected to produce unit revenue significantly above the corresponding months in 2019, the Company is observing new seasonal demand patterns, with lower-demand months such as January & February 2023 growing less than higher-demand months.” – United Airlines

ECONOMY

• US inflation eases to 6.0% in February, in line with expectations (FT)

• China activity data expected to show improvement in retail sales, industrial output and fixed asset investment (Bloomberg)

• Australian consumer and business confidence weak and increases the probability of an RBA pause in March (Bloomberg)

• UK labor market shows signs of easing with weaker pay growth (Bloomberg)

Deeper Dive

US inflation: Where are we?

• Headline inflation eased to 6.0% year-on-year in February, down from 6.4% in January and in-line with consensus expectations

• Core inflation was slightly lower to 5.5% from 5.6% in January and in-line with market expectations

• US inflation has moved from a peak of 9.1% last June and that decline has mostly been driven by lower prices for fuel, used cars and gas

Some other interesting observations and comments:

• Far from over: "February's CPI report shows that inflation is not vanishing quickly and there remains a compelling need for the Fed to continue raising rates." - Bloomberg

• Shelter & Medical: Services CPI ex shelter and medical jumped 0.9% month-on-month, the most since April 2022. It's running 7.6% year-on-year and a key reason as to why inflation reports remain elevated

• Rents: Owners' equivalent rent (OER) portion of February CPI was up 8.0% year-on-year. Shelter makes up approximately a third of the CPI weighting

• Outlook: "Despite the strength in today’s core inflation measure, we expect inflation to slow rapidly through the second half of 2023 as the decline in house prices, which is leading to a flat lining in new rent agreements eventually feeds through into the CPI." - ING Economics

Sectors to watch

A one day relief rally is not enough to help us distinguish whether or not the pain is over. A lot more work and time is needed.

Volatility remains high, the US banking crisis is still playing out and there's several marketing moving catalysts next week including the RBA and Fed interest rate decisions.

Our overnight US ETF watchlist was generally higher but as you can imagine, most of them look like three massive red candles followed by a small green candle. Some sectors of interest for today and/or this week include:

Energy: The US banking crisis is taking a toll on oil prices, which fell 4.0% overnight to a 3-month low. If WTI undercuts the December low, it will mark the lowest price point in 15 months.

WTI weekly chart (Source: TradingView)

Iron ore: Singapore iron ore futures have continued to grind higher in the last five days, up 4.6% to US$132.70 a tonne. Over the same time period, heavyweights BHP, Rio Tinto and Fortescue are down around 5-6%. Will gloomy sentiment continue to weigh on miners or is there a bit of a mismatch going on here? We'll also see several key Chinese data points this afternoon including industrial production and fixed asset investment, which could provide more clues about how the reopening play is going.

Singapore iron ore futures daily chart (Source: TradingView)

Tech: The Nasdaq and S&P 500 tech sector outperformed overnight. Our sub-sector ETFs like Fintech, Semiconductors, Cybersecurity and Cloud were also strong performers, up more than 2%. That said, tech faced three consecutive sessions of heavy selling followed by a bounce overnight.

ASX corporate actions occurring today:

• Trading ex-div: TPG Telecom (TPG) _- $0.09, Mercury NZ (MCY) – $0.079, Breville Group (BRG) – $0.15, Eagers Automotive (APE) – $0.49, Inghams (ING) – $0.045, SRG Global (SRG) – $0.02, Maas Group (MGH) – $0.03, Austal (ASB) – $0.04

• Dividends paid: Virgin Money (VUK) – $0.13, Bell Financial Group (BFG) – $0.045, Enero Group (EGG) – $0.065

• Listing: None

Economic calendar (AEDT):

• 1:00 pm: China Industrial Production

• 1:00 pm: China Retail Sales

• 1:00 pm: China Fixed Asset Investment

• 11:30 pm: US Producer Price Index

• 11:30 pm: US Retail Sales