0:02

A listener production Hotter

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inflation numbers send Wall Street

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stocks lower. And ASX

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to fall after shock US inflation data.

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I'm Tom. And I'm Ryan.

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It's Thursday the 11th of April. Welcome

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to the Comsec Market Update. Ryan, US

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stocks have just closed moments ago. The

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Dow Jones finished down by 1.1%. The

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S&P 500 down 1%. The

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NASDAQ down 0.8%. Interest

0:32

rate markets substantially higher. The

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March CPI, as had

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been feared, came in with a

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deal more heat attached to it.

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Yes, so we saw hotter than

0:43

expected inflation data. That follows the

0:45

stronger than expected jobs data last

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Friday. And the chances

0:50

of a June Fed rate cut now have been

0:52

quashed, Tom. So we did see the

0:54

US headline inflation rates lift by 0.4%

0:57

in March. The

0:59

same as the core rate. It

1:01

was the fourth consecutive month

1:04

where we did see quite strong outcomes

1:06

as far as inflation is concerned. If

1:09

you look at the headline number, the annualized growth rate

1:11

lifted from 3.2% to 3.5%. And

1:15

the annualized core inflation rate was steady at

1:17

3.8%. Markets were

1:19

looking for a core rate of 3.7%. So

1:22

that's really the rub right there. The

1:24

core rate of inflation, which is what

1:26

central banks generally reflect on most deeply.

1:28

I like the way you just

1:31

glossed over the way that the June rate

1:33

cut had been canceled. I was going to get

1:35

to that when we talked about interest rate markets.

1:38

Yes, I mean, only moments ago

1:40

it feels like there was a 75% chance

1:43

in the market's pricing that there would

1:45

be a June cut

1:47

of a quarter of a percent. And

1:50

as we speak now, there is almost

1:52

a 0% chance. Things

1:55

move quickly in the markets. They do very

1:57

quickly. So financial markets are now pricing in

1:59

a... So we're now seeing September as the likely

2:01

month for rate cuts about 65.8%. So

2:07

markets have significantly paid back their rate cut

2:09

expectations on the back of this data. The

2:14

strength was caused by a lift in shelter prices and we also saw

2:16

that the rate cuts were not exactly the

2:18

same. So

2:21

we did see shelter prices lift 0.4%, energy costs are at 1.1%.

2:27

But what was important was

2:29

the super core measure of deflation. So

2:32

that's the one the US Federal Reserve looks like. I

2:34

know we're providing a lot of statistics here and it

2:36

can be radically huge. Now let's just quickly explain what

2:38

the super core is. In the midst

2:40

of the pandemic, there were a lot of things that

2:42

were happening. There was a very acute move higher for

2:44

housing prices and that troubled the readings in relation to

2:47

inflation. So

2:52

they tried to come up with this measure,

2:54

your super core measure that takes out housing

2:56

related costs and gives you an even more,

2:58

well in their eyes, realistic example of what's

3:00

going on. But

3:04

you know, it's still what people don't live in houses. Well,

3:06

that's right. Exactly. So the

3:08

measures you quite rightly measure services, inflation, excluding food, energy

3:10

and housing. And

3:13

we did see super core services up 0.65% in the

3:15

month. Medical

3:19

care services jumped 0.6%. Transport

3:23

services lifted 1.5%. Overall on an annualised

3:25

basis, that measure is up 4.8% year on

3:27

year in March. So that's

3:29

the measure that we're going to be looking at. Overall

3:32

on an annualised basis, that measure is up

3:34

4.8% year on year in March. We're

3:37

a million miles away from the 2% target at

3:39

the moment overall. And we

3:41

need to see inflation coming in at

3:43

roughly half of what is exactly occurring each

3:45

month at the moment at around 0.2% to

3:48

get anywhere near 2% by the end

3:50

of the year. Now, the words of

3:52

Neil Kashkari, the head of the Minneapolis

3:54

Federal Reserve, start to take on a

3:56

different quality. And as the Kashkari last

3:59

week said, there's a... probability that no rate

4:01

cuts will emerge this week and this is

4:03

something that the markets are beginning to consider

4:05

with a little more gravity. It was only

4:07

just a week ago that Fed share and

4:10

Powell hinted at three rate cuts. We got

4:12

the latest minutes from the Federal Reserve and

4:14

they also suggested three rate cuts too but

4:16

I think that information is now dated based

4:19

on today's data and that was reflected in

4:21

the bond market. We love to talk about

4:23

it. The 10-year US Treasury yield jumped by

4:25

18 basis points to 4.55%. Above

4:30

that 4.5% threshold we've been talking about,

4:32

the highest level since November, the two-year

4:34

surged by 22 basis points. It's

4:37

the most interest rate sensitive part of the

4:39

Treasury curve to 4.97%, not far off 5%

4:44

and then on top of that, Tom...

4:46

Let's just stop there for a moment.

4:48

That is exactly that unwinding of the

4:50

rate cut in June.

4:52

Very good point and then on top of

4:54

that we had a very weak Treasury option,

4:56

39 billion of 10-year notes. Well, it's hard

4:58

to have a Treasury option right. I know,

5:00

strange, 4.5% to 6% it came in, weak

5:02

demand and that put even more pressure on

5:04

the US Treasury market and that's why we

5:07

did see a big sell-off and a spike

5:09

in those bond yields as well. Sometimes the

5:11

bond market can be a bit inside baseball

5:13

as the Americans say. That Treasury

5:15

option that we're talking about is the

5:17

equivalent of it raining

5:20

and then having the dam

5:22

burst. The US Treasury was selling government

5:24

bonds on a day when they're always

5:26

already acute selling because of the higher

5:28

than expected inflation numbers. The two and

5:30

10-year yields posted the biggest daily gains

5:32

since March, 2023 and September, 2022

5:36

respectively to put things in perspective. There

5:39

are two other things I want to add

5:41

to the way that the stock market performed.

5:44

We had the Russell 2000

5:47

Index sell off very aggressively. This is

5:49

a very broad measure of the market

5:51

that takes in smaller organisations.

5:54

That index was at a six-week low. It fell by the

5:56

most part of 3%, 2.8% to be exact. arguably

6:00

one of the most interest rate sensitive

6:02

parts of the market. The Philadelphia Semiconductor

6:04

Index fell by 1.6%. So I suppose

6:08

if there's one consolation is that there

6:10

was a little bit of a moderation

6:12

from the lows of the session for

6:14

these stocks. So at its worst, the

6:16

Dow was down 1.5% similar outcome for

6:18

the S&P 500 and NASDAQ was down

6:20

1.2%. So it

6:24

wasn't settling right on the lows of

6:26

the day, which is a bad technical

6:28

signal. But they would be quite

6:30

cautious in the days ahead where these stocks

6:32

are concerned. Basically the interest rate sensitive stocks

6:34

that you mentioned were the hardest hit. Real

6:36

estate stocks are down 4.1%. The biggest one

6:38

day percentage drops since June 2022. We saw

6:41

housing shares

6:43

down 4.3%. Rate sensitive

6:45

tech shares are also lower. We saw

6:48

Microsoft and Apple pull back up to

6:50

1.1% and then bank shares including JP

6:52

Morgan Chase and industrial shares like Honeywell

6:54

slipped by up to 1.4%. All

6:57

worries about this higher for longer interest

6:59

rate narrative that is now pervading the

7:01

markets. Around November time, late October time last

7:03

year, there was a signal from the Fed

7:06

that there'd be rate cuts this year. It

7:08

was off to the races for the stocks.

7:10

That was the genesis of the rally. Now

7:13

the question is whether or not we've seen

7:15

the full extent of that and whether or

7:17

not realism starts to sink in because this

7:19

is really where we are at the moment.

7:22

It's that intersection of where hopes have

7:24

now collided with reality and

7:27

a vastly different view can emerge. It'll

7:29

be disappointing for the US Federal Reserve.

7:31

The disinflation trend has clearly stalled at

7:34

the moment and of course

7:36

are now up against the US Presidential

7:38

election in November. That could complicate the

7:40

timing of rate cuts as well. Earnings

7:43

are going to be the big focus with

7:45

the banks earnings coming out on Friday and

7:47

that's going to drive the share market likely

7:49

in the next few days. It doesn't bode

7:51

particularly well as far as the local share

7:53

market's concerned this morning. The futures are telling

7:55

us the ASX200 will be well

7:57

in the red when we kick off down by that point.

8:00

The point that I'd put to you,

8:02

Ryan, is that given

8:05

the opaque direction

8:08

that we've had from the Reserve Bank

8:10

and given the fact that we haven't

8:12

been as aggressive in terms of our

8:14

rate hikes and the whole narrative around

8:16

interest rates locally is vastly different to

8:18

what we have seen elsewhere,

8:20

are we going to be

8:22

affected to the same extent? Well, certainly

8:25

the commodity space isn't going to

8:27

help us too much. Energy certainly will be

8:29

a positive, but we have seen that strong

8:31

US dollar overnight on the back of that

8:33

hot inflation data weigh on iron ore futures

8:35

down 0.3% to 104.02 US dollars

8:39

a ton. Gold's off record highs down 0.6% to

8:41

23.48.40 US dollars an ounce. So

8:44

I think the material sector after a good run

8:46

could be under some pressure today and that could

8:48

weigh on our market. We've also seen the banks

8:51

in the United States under pressure today, so

8:53

it doesn't bode well. So Ryan,

8:55

you make a very good point around the

8:57

strength of the greenback. It's trading at its

8:59

highest level in nearly six weeks, which has

9:02

made the casualty of the Aussie dollar all

9:04

the more graphic at its highest levels yesterday

9:06

trading around 66.3 US cents. It

9:09

floated with the area just below 65 as we speak. It's

9:12

trading at 65.13 US cents. Have

9:15

a great day. We'll talk to you again tomorrow.

9:22

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