Morning Wrap: S&P 500 sold off on hot producer inflation, ASX set to fall

Major US benchmarks sold off on hotter-than-expected produce price data, US consumer sentiment bounces in December, China unleashes more stimulus for real estate companies, Putin considers cutting oil production in response to the G-7 price cap and a massive week ahead for economic data.

Let's dive in.

MARKETS

Major US benchmarks tried to extend gains in early trade but sold off on hotter-than-expected producer price data.

• The S&P 500 posted its first weekly decline in three weeks, giving back all the gains it achieved in the last two weeks

• The Dow underperformed due to declines from heavyweights Walmart (-2.3%), Nike (-1.7%), Caterpillar (-1.6%) and Home Depot (-1.1%)

• Energy led to the downside as oil prices faded early gains. The S&P 500 Energy Index fell -8.4% last week

• Materials followed closely behind as higher-than-expected producer prices pushed the US dollar and bond yields higher

• 63% of stocks declined

• 49% of stocks trade below their 200-day moving average (47% last Friday, 40% a week ago) 

STOCKS

Tesla (+3.2%) recouped some of the losses from earlier this week but finished the week down -8.1%. Reuters reported that the EV maker will suspend Model Y assembly at its Shanghai plant between 25 December and 1 January.  

Lululemon (-12.85%) beat third-quarter earnings expectations but gave softer-than-expected guidance for the holiday quarter. 

WORLD NEWS

• Over 70% of fund managers see equities rising next year (Bloomberg)

• Investors see Chinese equity market rally in 2023 on reopening (Bloomberg)

• Big week of central bank action incl decisions from Fed, ECB, BoE (Bloomberg)

• Fed seen as more comfortable with easing financial conditions (Reuters)

ECONOMY

US producer prices rose 0.3% month-on-month in November, from 0.3% in October. 

• Producer prices came in above analyst estimates on both headline (7.4% versus 7.2% est) and core (6.2% versus 5.9% est)

• “Still falling quickly on a year-on-year basis, but upside surprises don't bode well for upcoming CPI prints.” - Liz Young, Head of Investment Strategy at SoFi 

• Year-on-year, producer prices are up 7.4%, the smallest annual increase since May 2021

US consumer sentiment improved to 59.1 in December from 56.8 in November.

• Well-above analyst expectations of 56.9

• One-year inflation expectations fell 0.3 percentage points to 4.6%, the lowest since September 2021 

• Five-to-ten year inflation expectations remain unchanged at 3.0% 

COMMODITIES

Iron ore futures fell -0.8% to US$110.80 a tonne. 

• Chinese banks opened more than 3tn yuan (US$431bn) in lines of credit for real estate companies, according to Nikkei Asia

Oil closed around breakeven after a choppy session. Prices initially rallied after President Putin said Russia could cut oil production in response to the G-7 price cap.

• “The short-term crude demand outlook has deteriorated significantly as no one has a strong handle on how bad a recession will hit the US economy … Energy traders are going to trade very technically here and probably look to defend the $70 level for WTI crude.” - Oanda senior market analyst, Ed Moya

Gold extended gains despite a hotter-than-expected producer price index report.

• “Gold might struggle for meaningful moves until we get the last key piece of inflation data before the Fed meets.” - Moya

• “This producer price report will have many expecting the CPI report to remain stubbornly hot, which could tilt the scales for the Fed to do more tightening beyond February.” - Moya 

The US market sold off on a hotter-than-expected producer price index, which has investors worried about stick inflation and consequently a potentially higher terminal rate and 'higher for longer' Fed.

Unfortunately for investors wanting to hear more about the ASX, this week is mostly going to be about the US, the Fed and European Central Bank. We have the US inflation print at 12:30 am AEDT on Wednesday and the Fed's interest rate decision at 6:00 am on Thursday.

The inflation print has driven massive moves for markets and in the case of the S&P 500:

• Aug 10: +2.1%

• Sep 13: -4.3%

• Oct 13: +2.6%

• Nov 10: +5.5%

"One could argue that the US CPI print is the big volatility event of the week given the market is desperate to see inflation falling towards target ... the market won't take too kindly to any print that doesn't show inflation heading lower," said Chris Weston, Head of Research at Pepperstone.

The ASX 200 is set to open -0.49% lower after a big turnaround last Friday. There wasn't anything too exciting in terms of specific sectors. Brace yourself for some whipsaw action as we head into a catalyst that might set the near-term tone for markets.

Sectors to watch

• Biotech: The iShares Biotechnology ETF experienced some selling after rallying to 11-month highs a few sessions ago. Do we see a top-heavy action follow through for local names like CSL?

iShares Biotechnology ETF (Source: TradingView)

Stocks going ex-dividend over the next week:

• Mon: None 

• Tue: None

• Wed: None

• Thu: Plato Income Maximiser (PL8) 

• Fri: None

ASX corporate actions occurring today:

• Dividends paid: Hancock & Gore (HNG), Washington H Soul Pattinson (SOL)

•  Listing: None

Economic calendar:

• 6:00 pm: UK GDP