Morning Wrap: US inflation soars, 100 bps rate hike on the cards, ASX to open flat

Wall Street tried to claw back losses after a hotter-than-expected CPI report, President Joe Biden reassured Americans that inflation will come down and the Bank of Canada unexpectedly hikes interest rates by 100 bps.

Let’s dive in. 

Markets

That was a loaded session.

US inflation came in at 9.1% in June, exceeding expectations of 8.8%. This prompted a knee jerk reaction for major US indices at the open, with the Dow -1.5%, S&P 500 -1.6% and Nasdaq -2.1%.  

Interestingly, Wall St has declined on every single inflation reading this year, except in January. All but one CPI reading since 2021 has exceeded consensus expectations, according to Bank of America. So an inflation surprise is hardly surprising.

It was rather strange seeing markets close well above session lows. US rate futures are now pricing in a 78% chance of a 100 bps hike at the Fed’s July meeting. This figure was just 7.6% a day ago, and zero a week ago.

President Joe Biden reassured Americans that inflation will come down, saying that the CPI reading is "out of date". “Today’s data does not reflect the full impact of nearly 30 days of decreases in gas prices, that have reduced the price at the pump by about 40 cents since mid-June,” he said.

• Discretionary and Staples were the only positive sectors

• Energy and Tech also held up relatively well

• Industrials, Healthcare and Financials underperformed

• 51% of US stocks declined

• 75% of US stocks trade below their 200-day moving average (75% on Wednesday, 75% a week ago)

Stocks

• Twitter (+7.9%) has filed a lawsuit against Elon Musk after he terminated the US$44bn deal to buy the company. Twitter said Musk’s conduct amounted to “bad faith” and accused him of trying to get out of the deal since “the market started turning” 

• Alphabet (-2.3%) plans to slow the pace of hiring for the rest of the year

  • In a letter dated 12 July, CEO Sundar Pichai said “like all companies, we’re not immune to economic headwinds”, with plans to pause development and re-deploy resources to higher priority areas 

• Delta Airlines (-4.5%) shares slumped on mixed earnings. The airline reported a quarterly profit thanks to higher airfares but vowed to improve reliability after an increase in delays and cancellations is set to impact its summer schedule 

Economy

• Korea raised interest rates by 50 bps to 2.25%, in-line with expectations

  • Largest hike since the bank adopted interest rates as its primary policy tool in 1999

  • Governor Rhee Chang-yong said he was open to outsized hikes and warned of further tightening

• New Zealand raised interest rates by 50 bps to 2.5%, in-line with expectations

• Canada raised interest rates by 100 bps to 2.5%, expectations were at a 75 bps raise

  • “With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” officials said in the policy announcement

• UK GDP unexpectedly rose 0.5% month-on-month in May

  • Consensus was expecting growth to be flat

  • The positive figure was supported by solid industrial output, a holiday boom and rising GP visits

• US inflation hit 9.1% in June, a 40-year high and above expectations of 8.8%

  •  US consumers were hit by a broad-based increase in prices including gas, food and rent

• Spain inflation jumped to 10.2% in June, a 38-year high but in-line with expectations

Commodities

• Iron ore prices are trying to stabilise around US$110

• Oil is making a small bounce after Wednesday’s collapse

• Gold prices came roaring back from lows of US$1,707 as a deepening Treasury curve inversion suggests a potential peak for yields  

Less sector talk today, more macro.

The ETFs we watch were mostly within the +/-2% range overnight.

The beaten up ones staged small but inconsequential bounces, including:

• Rare Earth/Strategic Metals +2.65%

• Steel +1.4%

• Hydrogen +0.4%

• Uranium +0.4%

Nasdaq futures plummeted from around +1% to -2% immediately after the inflation report was released at 10:30 pm AEST - I then went to bed.

It was surprising to see such an intraday turnaround for major US benchmarks, that don't seem to care about:

• Likelihood of a 100 bps hike jumping from 7.6% to 78%

• Fed focused on controlling inflation, not growth

• Highest 2-year and 10-year Treasury yield inversion since 2000

Instead, the market is buying into the view that inflation (or at least July's reading) will offer some relief, given the broad-based pullback in commodity prices and recent decline in US nationwide gasoline prices.

Looking even further ahead, Nomura expects major developed market central banks to begin cutting interest rates in 2023 as inflation eases, Reuters reported.

The investment bank forecasts US interest rates to peak at 3.75% in February next year, and a 25 bps rate cut in September 2023.

So here we are. Going full circle again.

ASX corporate actions occurring today:

• Ex-dividend: SEC

• Dividends paid: NBI

• Listing: BTE

• Issued shares: 360, AGE, ANL, BRV, BTE, BUB, CYM, DUB, FFT, FGL, HIO, HYD, NAB, NBI, NUH, ORN, PAR, PCI, PPS, RUL, SMS, SRJ, TGA, TOU

Other things of interest (AEST): 

• Australia Unemployment Rate (June) at 11:30 am

• US Producer Price Index (June) at 10:30 pm