Overnight: I’ve Seen The Light

By Greg Peel

Inflation Sensation

After the opening bell on the local market yesterday, the ASX200 did nothing for an hour. Then at 11am it shot up 80 points in forty minutes, and that’s where it closed. What happened at 11? The CPI numbers came out.

Strange days indeed.

In the March quarter, the headline CPI rose a greater than expected 0.3% for 2.2% annual growth. The first time the headline has exceeded 2% since June 2018. The core CPI, ex of food & energy, rose 0.5% to 1.8% — still below the RBA’s 2-3% target band.

Lap it up while you can you won’t be seeing numbers like these again for a very long time.

We recall that the December quarter had seen a full 0.7% jump in the headline number, reflecting increased food costs due to a three-year drought topped off by bushfires. The bushfire impact on food prices carried into the March quarter, and then we morphed into grocery hoarding.

Yesterday Coles’ ((COL)) March quarter sales numbers reflected exactly that trend. Supermarket sales rose 13%. But the month of April has seen demand back at where it was pre-virus, management noted. To that end, toilet paper rationing has been eased. Coles fell -4.4%.

I don’t think one needs to explain what is happening to petrol prices as we move through the June quarter.

The rise in core inflation included increases for housing construction costs and rents. Watch these fall off a cliff.

But hey, any sign of inflation is good for the banks, as it implies higher interest rates and thus better margins. The financials sector leapt a whopping 4.9% yesterday to provide the bulk of the index move. The ten-year bond yield did not budge. The RBA won’t be lifting its cash rate for many months, at least.

To be fair, National Bank ((NAB)) did put away its capital raising and Westpac ((WBC)) provided a hint it may not also need to raise capital (we’ll find out on Monday) which provided relief in a beaten down sector. ANZ Bank ((ANZ)), however, still has to spill the beans this morning.

Banks notwithstanding, yesterday was text book “risk on”. Three sectors closed in the red; staples, healthcare and utilities. Telcos only just scraped across the line.

Energy won the day in rising 5.2%, as the WTI price kicked on in Asian trade. It is up 16% this morning from yesterday morning, bearing in mind that’s all of two dollars. Thereafter we drop down to next best consumer discretionary, up 2.0%, with all other sectors posting gradually lesser gains.

If it weren’t for some particularly large gains for particularly beaten-down stocks, NAB’s 6.3% surge and Westpac’s 5.2% might have made it on to the index winners table. But they were well down the list. Crown Resorts ((CWN)) took the gold, up 10.9%, after US private equity giant Blackstone took a stake. Star Entertainment ((SGR)) rose 10.2% in sympathy.

Among the losers, Fisher & Paykal Healthcare ((FPH)) fell -4.4% as the Australia/New Zealand case-count begins to suggest we won’t need all those ventilators after all. ResMed ((RMD)), which makes most of its profits in the US and reports earnings tomorrow, fell -3.3%.

I could rattle off a long list of remarkable stock moves but I can pick just two to tell the tale. Building materials company Wagners ((WGN)), which had fallen -78% from January, rose 26.7% yesterday. Home delivered meal service Marley Spoon ((MMM)), which had risen 420% since mid-March, fell -14.6%.

One is reminded of the image of George W. Bush standing on the aircraft carrier with a “Mission Accomplished” sign behind him. And the futures are up another 108 points this morning.

Elixir of Life

The US National Institute of Allergies & Infectious Diseases said last night that a preliminary data analysis of the trial data from 1,063 patients found patients taking Gilead’s remdesivir recovered 31% faster than those taking a placebo. In remdesivir patients, the median time to recovery was 11 days. In placebo patients, it was 15 days.

Dr Anthony Fauci, the NIAID’s director, told reporters at the White House that remdesivir had “a clear cut significant positive effect in diminishing the time to recovery.” He said the mortality rate was lower in the remdesivir group (8%), when compared with those taking the placebo (11%), noting that it’s not yet a statistically significant finding. However, he further cemented his support for the remdesivir data, saying “this will be the standard of care.”

Wall Street will grasp at anything. Prior Chinese studies, which were not considered definitive as there was no placebo control group, found remdesivir did stuff all.

Dr Fauci nonetheless has seen soaring approval ratings, unlike someone else, who in explaining why the US represents a highly disproportionate one third of the three million global case-count tweeted “the only reason the U.S. has reported one million cases of CoronaVirus is that our Testing is sooo much better than any other country in the World”.

The more extraordinary thing is the highly disproportionate number of Americans who actually believe everything he says.

The Fed wrapped up its policy meeting last night and in his press conference address, Jerome Powell said in simple terms the Fed will continue to do whatever it takes yadda, yadda. But he also made the point the central bank is “lending, not spending”, and can’t provide handouts to businesses nor lend to businesses that are insolvent.

In other words, Powell was saying the Fed is not God, and cannot prevent the fallout from the pandemic, which he said “will weigh heavily” on economic activity, employment and inflation in the near term.

Those comments had the Dow off a hundred points from its early high.

To sum up the mood on Wall Street last night, we might note that Facebook rose 6% during the session, ahead of its after-the-bell earnings release. That showed advertising revenues to be not quite as bad as feared, and the stock is up another 9% in the aftermarket.

Outperformance of the Nasdaq was driven by all the Facebook types. Google, which reported after the bell the night before, rose 8.7%.

Yet the S&P500 was driven by bargain hunting, if that’s what you can call it after a 30% rally. Energy and financials were the best performing sectors. Only staples and utilities closed down on the day.

The US GDP fell -4.8% (year on year) in the March quarter, the biggest drop since 2008, worse than -3.9% forecasts. But wait for June. Forecasts are in the -30-40% range.

Commodities

Outside of oil, it’s yet again a case of nothing to see here amongst commodity prices, with metal markets looking like rabbits in the headlights.

The Aussie is up another 1.1% to US$0.6559, which makes sense given the CPI, despite it being ancient news, but the Aussie was already up most of the way beforehand.

The forex market must have gotten itself so short.

Today

The SPI Overnight closed up 108 points or 2.0%.

Australia will see private sector credit numbers today.

China releases April PMIs.

The first estimate of eurozone GDP will be released and the ECB holds a policy meeting.

ANZ reports earnings, bad debt impairments, no dividend and possibly other capital measures.

Janus Henderson ((JHG)) reports quarterly earnings and Woolworths ((WOW)) quarterly sales, while there’s a host of other updates due including that of Qantas ((QAN)).

Fortescue Metals ((FMG)) and Newcrest Mining ((NCM)) are among those providing production reports. Woodside Petroleum ((WPL)) holds its AGM.

The Australian share market over the past thirty days