ASX to slip ahead of budget

ANZ is being investigated by the corporate regulator over concerns its traders manipulated the sale of government debt last year, the second time in a decade the bank’s fixed-income team has been accused of improperly profiteering.

Two sources with knowledge of the investigation said the Australian Securities and Investments Commission had begun its work after receiving a complaint from the Australian Office of Financial Management, which manages government debt.

The agency became concerned last year about the way in which some of its debt had been sold, sources who spoke on condition of anonymity said, and believed that bank staff involved in organising the sale of bonds may be acting inappropriately.

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Inflation could be back within the Reserve Bank’s 2 per cent to 3 per cent target band by Christmas, due to a new round of cost of living assistance and slower growth next financial year, Tuesday’s federal budget will forecast.

The new inflation forecasts, which revive chances for a pre-election interest rate cut, are markedly lower than those issued by the RBA last week, but Treasurer Jim Chalmers said the discrepancy was a result of the board not knowing what was in the budget.

“It’s just a function of timing, not a function of opinion,” he said.

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After a relative dearth of data last week, investors will be put to work with Tuesday evening’s federal budget, first quarter wages on Wednesday and the latest jobs data on Thursday.

In a note, NAB said its economists expect wages growth of 0.9 per cent quarter-over-quarter in Q1, which would leave the year-over-year rate at 4.2 per cent. That’s in line with the RBA’s May forecast.

“Quirky rounding practices means we could see either a 0.87 or a 0.94 (absent any revisions). Q4 was on the stronger side, driven by strength in public sector wage increases, including as a result of new agreements for some education and health staff which saw both larger increases and an unusually large share of jobs receiving pay rises in the quarter. Note Q1 wages data reflects pay changes in the three months to late February.”

As for the jobs data, NAB said it expects a 30,000 plus increase in employment, which would be a continuation of recent trend growth and a bit of a rebound from the 7000 decline in March.

The March unemployment rate was 3.84 per cent unrounded, and NAB expects an unemployment rate of 3.9 per cent in April. The RBA last week forecast an unemployment rate averaging 4.0 per cent in Q2.

“More broadly, we expect the labour market will continue to cool, but a rapid deterioration is unlikely.”

Westpac said it anticipates a moderate but slightly below-trend gain in employment of 20,000. “With participation holding flat at 66.6 per cent, we see room for the unemployment rate to round up to 3.9 per cent in April.”

Shares in New York were modestly higher, with techs somewhat lagging. All three indexes were up for the week with the blue-chip Dow nabbing its largest Friday-to-Friday percentage advance since mid-December, Reuters said.

The S&P 500 gained 0.2 per cent to 5222.68. The Dow Jones was 0.3 per cent higher, while the Nasdaq Composite slipped 0.03 per cent.

The key overseas focus this week is the release of US April CPI at 10.30pm on Wednesday. Of course the federal budget on Tuesday will also be a highlight as will the latest jobs data on Thursday.

European stocks posted their biggest weekly gain since January after a slew of better-than-expected earnings reports, Bloomberg reported.

The Stoxx Europe 600 index was up 0.8 per cent by the close in London — scaling yet another record and taking its weekly advance to 3 per cent.

The UK’s FTSE 100, France’s CAC 40 and Germany’s DAX also scaled record peaks. The UK’s run higher comes as data showed the economy bounced back strongly from a shallow recession at the end of last year.

In a note, Bank of America said investment flows showed that bonds are back as the probability of a ‘no landing’ economic scenario rises. A BofA poll conducted between May 3 and 8 — after the Fed decision — showed that 49 per cent of respondents said that being long rates was their highest-conviction trade of the year. That’s up from 30 per cent in April.

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ASX futures down 15 points or 0.2% to 7765

• AUD -0.2% to 66.04 US cents
• On Wall St: Dow +0.3% S&P +0.2% Nasdaq -0.03%
• In New York: BHP +0.1% Rio -0.3% Atlassian -0.1%
• Tesla -2% Microsoft +0.6% Apple -0.7% Nvidia +1.3%
• Alphabet -0.8% Amazon -1.1% Meta +0.2%
• VIX -1.1% QQQ +0.2% TLT -0.6%
• Stoxx 50 +0.6% FTSE +0.6% DAX +0.5% CAC +0.4%
• Spot gold +0.6% to $US2360.50/oz in New York
• Brent crude -1.3% to $US82.83 a barrel
• Iron ore flat at $US115.80 a tonne
• 10-year yield: US 4.50% Australia 4.32% Germany 2.52%

Investors should take a breath, according to Bank of America strategist Savita Subramanian, with macro investing having become the new extreme sport.

“If GDP misses and inflation beats, it must be stagflation. Investor ethos has moved from fear of an impending recession to current stagflation concerns, with no stop in between.”

Subramanian, however said of the last 305 quarters, 20 were recessionary, 13 were stagflationary and 90 per cent of the time, things were OK.

“A slight miss on 1Q GDP, a drop in one month’s ISM, and CPI still too high to enable the Fed to ease must, together, mean stagflation according to the bears. But the GDP miss was consistent with demand picking up amid import/inventory issues. If stagflation is here, own equities over bonds, value over growth, and dividend yielding stocks generally outperform.”

Subramanian also said investors should be wary of trying to time the market. “The probability of losing money in the S&P 500 drops from a coin flip (46 per cent) to just 5 per cent by extending one’s holding period from a day to a decade.

“Market timing is fraught with peril, and panic selling results in outsized opportunity costs (best days often follow worst days). Since the 1930s, missing the 10 best S&P 500 days per decade would have yielded 66 per cent vs about 23,000 per cent by remaining invested.”

Among the losers as interest rates hold at high levels for longer, because of persistent inflation, are unprofitable companies, according to Goldman Sachs equity strategist David Kostin.

“The typical stock that analysts expect to become profitable this year or next year has fallen by 4 per cent year-to-date, firms expected to become profitable in 2026 have declined by 15 per cent, and stocks forecast to turn profitable after 2026 have dropped by 28 per cent.

“Unprofitable growth stock EV/Sales multiples have compressed from 14 times in 2021 to 4 times today.”

Kostin said from a fundamental perspective, CPI data informs the path of Fed policy, which will affect equity valuations, interest expenses, and investor risk sentiment.

And so the poor performance of unprofitable companies “appears appropriate in relationship to the shift in the interest rate environment”, he said.

“The challenges of a high interest environment for unprofitable stocks also helps explain some of the recent weakness of small-caps. Consensus currently expects that 31 per cent of companies in the Russell 2000 will be unprofitable over the next 12 months versus 0 per cent for the S&P 500.”

The latest monthly US consumer price data will be released at 10.30pm on Wednesday, a key metric for policymakers on the Federal Open Market Committee.

Fundstrat Global’s Tom Lee said he’s recommending clients “buy” equities leading into the CPI data. “We think an ‘in-line’ April CPI will cause the market’s expected number of Fed cuts (by year-end 2024) to rise from about 1.8 towards 2.5 cuts or more. The rationale, in our view, is that this April CPI will highlight the possibility that auto insurance’s disproportionate impact on CPI is eroding.

“The key in April CPI remains auto insurance. This rose +2.58 per cent in March and was the singular largest contributor to the ‘hot’ March reading (miss). It is not entirely clear if April will show an improvement. But we think each month that passes, this probability rises that the surge in auto insurance is ebbing.”

Scotiabank’s Derek Holt has a nuanced view on the pending April data, which he estimates will show a rise of 0.4 per cent month-over-month seasonally adjusted for headline CPI and 0.3 per cent for core CPI ex-food and energy which this time is similar to the Cleveland Fed’s ‘nowcast’ estimates.

“A cooler reading compared to the recent trend would probably reignite market pricing for cuts but wouldn’t be enough to convince anyone at the Fed to move any time soon.

“A reading in line with expectations and hence the recent trend, or hotter yet, would probably offer further motivation for FOMC officials to take an axe to the March dot plot when they publish another one next month.”

Santander’s Stephen Stanley said: “The inflation figures will be the most important in driving the outlook for Fed policy. After three bad months to start the year, officials will want to see inflation start to moderate.

“Until we get a stretch of more contained inflation numbers, the FOMC will most likely remain on the sideline. April could be a baby step in the right direction, as I look for the core CPI to post a 0.3 per cent advance, a tenth lower than the readings in January, February, and March. Still, such a result is going to be too high for the Fed’s liking and will not bring us much closer to a rate cut.”

TD Securities said: “Our forecasts for the April CPI report suggest core inflation slowed to a ‘soft’ 0.3 per cent m/m pace after posting a third consecutive strong gain at 0.4 per cent in March. Headline CPI inflation likely printed a softer 0.3 per cent m/m increase despite the notable jump in gasoline prices.”

Looking ahead, TD said it expected headline CPI inflation to make little inroads in 2024, but for the core segment to slow to 3.2 per cent y/y in 24Q4 from 4.0 per cent in Q4 2023. Separately, we forecast core PCE inflation of 2.7 per cent y/y for 24Q4.

Josh Gilbert, market analyst at eToro, said: “While markets initially eyed July for potential rate cuts, the outcome of this week’s data could alter this trajectory.”

Gilbert also said a potential easing of price pressures in April could sway the Fed’s decision-making, possibly putting rate cuts back on the agenda.

Shares of Zeekr Intelligent Technology Holding, the high-end electric car brand under Zhejiang Geely Holding Group, rose 35 per cent after an expanded initial public offering that’s the biggest US listing by a China-based company since 2021.

Zeekr’s American depositary shares closed at $US28.26 apiece on Friday (Saturday AEST) in New York, giving the company a value of about $US6.9 billion. The company on Thursday raised $US441 million from the sale of 21 million ADS priced at the top of a marketed range of $US18 to $US21.

Underwriters have an option to purchase as many as 3.15 million more ADSs in an over-allotment option, which if exercised in full will lift the offering to 24.15 million ADSs, representing about 9.1 per cent of Zeekr’s issued share capital, according to an earlier statement.

Geely Auto, Mobileye Global and Contemporary Amperex Technology were interested in subscribing for as much as $US349 million worth of shares in the offering, Zeekr had said in its filings.

Zeekr’s offering adds to a US IPO market rebound that is steadily overtaking the lacklustre volumes of the past two years. The roughly $US17 billion raised via listings on US exchanges since January 1 compares with less than $US10 billion at this point last year, with close to half of 2023’s volume coming from a single blockbuster, Johnson & Johnson’s spinoff Kenvue, according to data compiled by Bloomberg.

Good morning and welcome to the Markets Live blog for Monday, May 13, 2024.

This blog is not intended as investment advice.