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Morning Bell 7 June

Grady Wulff
June 7, 2023

Wall St closed modestly higher on Tuesday as investors await inflation data and the Federal Reserve’s policy meeting outcome on the rate hike front next week. The S&P500 added 0.24% trading near a nine-month high, while the Nasdaq added 0.36% and the Dow Jones closed just 0.03% higher on Tuesday.

In corporate news on Wall St, Apple shares dipped 0.2% a day after the tech giant unveiled its highly anticipated virtual reality headset and software at its Worldwide Developer Conference. The dip in the stock followed the tech giant’s shares hitting at all-time high ahead of the announcement during Monday’s session.

Over In Europe, markets closed marginally higher on Tuesday ahead of a new round of central bank interest rate decisions. Healthcare stocks rallied while oil and gas stocks dipped as global growth concerns offset the Saudi output cut-driven rally from the weekend. Germany’s DAX rose just 0.18% on Tuesday, the French CAC added 0.11% and, in the UK, the FTSE100 rose 0.37%.

The 3-day ASX rally ended yesterday with the key index closing 1.20% lower as investors responded to the RBA rate hike announcement of a 25-basis point hike for June, in addition to RBA governor Philip Lowe flagging ‘further tightening of monetary policy may be required to ensure that inflation returns to the target 2-3% range in a reasonable timeframe’. The nation’s cash rate now sits at an 11.5 year high of 4.1% for June and is up 400-basis points since the RBA began raising rates last May.

The key drivers of the interest rate hike surround the tight labour market, low unemployment, which moved higher in April, and wages growth compared to low productivity output, which accelerated to a decade-high in the March quarter.

Dr Lowe said recent data indicated upside risks to the inflation outlook notably labour costs are rising ‘briskly’ with ‘growth in the public sector wages expected to pick up further and the annual increase in award wages was higher than it was last year’. While majority of economists were expecting a pause in the cash rate for June, some lifted their call to expect the hike on Friday last week after the Fair Work Commission announced a 5.75% raise in minimum wages, and CPI data last Wednesday came in hotter than expected. For those with a variable interest home loan, you’ll unfortunately feel a heavy brunt of this rate hike if/when the banks pass it on in full to loan customers, with the average loan of $500,000 incurring a $76 increase in monthly repayments after this rate hike, taking the total monthly increase to $1134 since the RBA began raising rates last May.

Retail spend has come down as the high cost of living pressures begin to bite, which is taking impact on Consumer discretionary stocks as the sector led the losses on the ASX yesterday. Stocks in this sector face some of the toughest headwinds from rate hike announcements with cost-of-living pressures depleting consumer demand for discretionary goods. Baby Bunting plunged over 23% on Tuesday after the infant goods retailer released a trading update and downgraded guidance amid muted sales growth.

Investors only bought into Utilities stocks yesterday given their defensive nature, meaning people still need the services such companies provide during all phases of the business cycle. On the commodities front this morning, oil is trading 0.81% lower at US$71.57/ barrel, gold is up 0.11% at US$1963/ounce and iron ore is up 2.84% at US$108.50/tonne. Iron ore hit a six-week high on Monday as the price rally this week has been sparked by hopes of a policy introduction in China through new measures to support the country’s property market.

What to watch today:

  • Ahead of the local trading session here in Australia, the SPI futures are anticipating the ASX to open 0.34% higher.
  • Taking a look at economic data out today, Australia’s GDP growth rate for Q1 is out just after midday with consensus expecting growth of 0.3% for Q1, down from a 0.5% expansion in Q4, which will mean the 6th consecutive period of economic growth but at a slower pace than prior expansions.
  • AU$1.00 is buying US$0.67, 93.20 Japanese Yen, 53.66 British Pence and NZ$1.10.

Trading Ideas:

  • Bell Potter has reduced the price target on Adacel Technologies (ASX:ADA) from 85 cps to 80 cps and maintain a buy rating on the leading global provider of simulation and control systems for the civil aviation and defence sectors, due to the company announcing two new contract wins but downgrading its FY23 guidance given one of the contracts was awarded later than expected and also delays in the finalisation of a contract renewal.

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