Morning Wrap: S&P 500 reverses gains as inflation expectations rise, ASX set to tumble

Major US benchmarks reversed almost all of Thursday's gains, consumer inflation expectations unexpectedly increased in October and US banks post better-than-feared earnings. We also take a look at a few interesting snippets about market returns as inflation peaks and why stocks fall further on pivots.

Let's dive in.

MARKETS

The market was quick to give back Thursday's short covering inspired bounce. US stocks tumbled after inflation expectations unexpectedly rose for the first time in seven months.

• All 11 US sectors declined

• Defensive sectors including Healthcare, Utilities, Financials and Staples outperformed benchmarks

• Growth-heavy sectors and resources led to the downside

• Materials, Energy and Discretionary fell more than 3% 

• 75% of US stocks fell 

• 70% of US stocks trade below their 200-day moving average (68% last Friday, 70% a week ago)

STOCKS

• Tesla (-7.6%) shares tumbled after Wells Fargo lowered its price target to $230 from $280 a share. Higher interest rates was the main catalyst behind the downgrade. Tesla shares are down -33.6% since late September  

EARNINGS

• JPMorgan (+1.7%) posted better-than-expected third quarter earnings, revenue was up 10% compared to last year but profits were still down -17%. The investment bank added US$808m reserves for bad loans and copped a US$959m in losses on securities

  • JPMorgan CEO: “In the US, consumers continue to spend with solid balance sheets, job openings are plentiful and business remain healthy. However, there are significant headwinds immediately in front of us.”

  • JPMorgan CFO on credit quality: “... we just don’t see anything that you could realistically describe as a crack … we do see some tiny increases but generally, in almost all cases, we think that’s normalisation.”

• Wells Fargo (+1.9%) reported better-than-expected earnings, even though net income fell -30% year-on-year

  • Wells Fargo CEO: "Credit performance remains strong … While we do expect to see continued increases in delinquencies and ultimately credit losses, the timing remains unclear … As we look forward, we remain bullish on our business opportunities"

• Citi (+0.65%) beat revenue expectations, which rose 6% but net income fell -25%

  • Citi CEO: "Banking was the business most adversely impacted by the macro environment with reduced deal flows and a lower appetite for M&A.” 

• Morgan Stanley (-5.1%) shares slumped on weaker-than-expected earnings as revenue fell -12% and profits tumbled -29% due to a decline in investment banking activity and investment management revenue

WORLD NEWS 

• Saudi and US clash over OPEC+ production cut (Fortune)

• China won't rush its clean energy transformation (Bloomberg)

• PBOC pushes banks to increase loans for infrastructure and manufacturing (Bloomberg)

ECONOMY

• German wholesale prices accelerated in September to 19.9% from 18.9% in August

• US retail sales were unchanged month-on-month in September from 0.4% in August

  • “Retail sales came in stronger than we were expecting in September. Ex-auto retail sales were up 0.1% and core control sales increased by 0.4%,” said Bank of America

  • “Our main takeaway from the September retail sales report is that the US consumer is still holding up. Recall that retail sales mostly capture the goods side of the economy, where inflation has been slowing.” 

• US consumer sentiment increased to 59.8 in October from 58.6 in September

  • The highest level in six months

  • Ahead of consensus expectations of 59

  • “Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers,” commented survey director Joanne Hsu 

  • “Last month, long run inflation expectations fell below the narrow 2.9-3.1% range for the first time since July 2021, but since then expectations have returned to that range at 2.9%.”

COMMODITIES

• Iron ore futures fell -0.9% to US$94.9 a tonne

• Oil prices tumbled to a one week low

  • “The crude demand outlook continues to have a bearish driver from the world’s two largest economies, as the US seems like it will be driven to a recession by the inflation-fighting Fed and while China will not likely have any major pivots with their zero COVID policy,” said Oanda senior market analyst, Ed Moya

• Gold prices got smashed as the US dollar and yields trended higher, down to a near 3-week low

  •  “Wall Street is nowhere near feeling confident they have a handle on how high the Fed will take rates and that is bad news for bullion,” said Moya

Other commodities of interest:

• Uranium futures +0.9% to US$50.1/lb

• Newcastle coal futures +0.8% to $397/t

• Palladium unch at US$1,989/oz

• Copper -0.5% to US$3.42/lb

• Platinum -0.6% to US$896/oz

• Aluminium -2.5% to US$2,283/t

QUICK BITES

• Morgan Stanley on core inflation: “on track to decelerate significantly by middle of next year ... we see drivers of disinflation on the horizon, most notably from a reversal in vehicle prices and a downshift in medical services.”

Source: Morgan Stanley

• Peak inflation leads to positive returns: 13/17 inflation peaks have led to positive returns in the following 12 months. Its worth pointing out that 1929 was a deflationary crash and 2008 was a credit crisis. US inflation peaked in June, and despite the latest print coming in higher-than-expected, was still the lowest level in 7 months

Source: BlackRock

• Stocks fall further on pivots: There's actually quite a big gap between when the Fed pivot's - defined as the first rate cut - and when stocks actually bottom. This narrative reiterates that the Fed tends to hike until something breaks

Source: Oktay Kavrak

Well, that was quick.

In early September we saw a massive four day rally into the hotter-than-expected CPI print. In early October there was an outsized two day rally into the better-than-expected jobs data.

Now, the rally lasted only one day. Just bear market things.

As noted last Friday, something just didn't feel right about this rally. The Fed is expected to remain aggressive, and there is an increasing likelihood that the fed's peak funds rate could be north of 5%.

Friday's Evening Wrap also talked about how the pullback is just as important as the rally. If the pullback is constructive and well-supported, then that may indicate genuine buying and easing volatility. What we saw overnight was the complete opposite.

SPI futures imply the ASX 200 will open around -1.5% lower, taking away almost all of Friday's gains. Its worth noting that the ASX is in far better shape than the US market. We're still trading well-above June lows and that's mostly thanks to being more financials and resource weighed.

Sectors to watch

Overnight ETF gainers: None

Overnight ETF losers: Steel (-4.39%), Uranium (-4.18%), Rare Earths/Strategic Metals (-3.73%), Hydrogen (-3.56%), Copper (-3.24%), FinTech (-3.06%)

The leads we normally look at were quite grim, so watch out for weakness for the above sectors.

Its worth noting that the US-listed BHP (ASX: BHP) fell -3.8%.

Stocks going ex-dividend:

• Mon: WAA, CDM, CDO, FGX, WMA 

• Tue: KSC

• Wed: None

• Thu: None

• Fri: SNC

ASX corporate actions occurring today:

• Dividends paid: SUL, SKS, CAR, COH, GDF 

• Listing: None

Other things of interest (AEDT):

• 11:30 pm: 20th National Congress of the Chinese Communist Party

• 11:30 pm: US NY Empire State manufacturing index