ASX to rise, RBA in focus, iron ore extends rally

On Wall Street, the Dow managed to edge higher while both the S&P 500 and the Nasdaq slipped to end their week. The mixed trading came after the November jobs report showed the US labour market remains strong despite a raft of interest rate increases.

Other top stories

ASX to advance as traders bet on lower RBA rate peak Shares are poised to open higher on Monday as markets trim the Reserve Bank’s cash rate peak to 3.6 per cent ahead of another expected rate rise on Tuesday.

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Investors bet on just two more rate rises next year Investors believe there is an outside chance of a pause in the official interest rate this week, and just two increases next year to achieve the central bank’s goal.

Santos ruling risks hitting east coast gas next year A landmark ruling against Santos’ gas project in the Timor Sea threatens widespread delays at other projects needed to reduce supply pressures on the east coast.

Why Domino’s Pizza’s $8b wipeout is nearing an end The pizza chain is pushing hard with ‘value’ deals in tougher times and some analysts think the stock may be worth a nibble.

Today's agenda

Local: MI inflation November at 11am AEDT; ANZ job ads November and third quarter business indicators at 11.30am AEDT

Overseas data: November services PMIs for China (Caixin), Eurozone (Markit), UK (Markit) and US (Markit, ISM); Eurozone October retail sales; US October factory orders and durable goods orders

Market highlights

ASX futures up 19 points or 0.26 per cent to 7334

• AUD -0.3% to 67.90 US cents
• On Wall St at 4pm: Dow +0.1% S&P -0.1% Nasdaq -0.2%
• In New York: BHP +0.7% Rio +0.9% Atlassian +0.7%
• Tesla +0.1% Apple -0.3% Amazon -1.4% Netflix +1.1%
• In Europe: Stoxx 50 -0.2% FTSE -0.03% CAC -0.2% DAX +0.3%
• Spot gold -0.3% to $US1797.79/oz in New York
• Brent crude -1.2% to $US85.86 a barrel
• Iron ore +4.1% to $US107.30 a tonne
• 10-year yields: US 3.49% Australia 3.39% Germany 1.85%

United States

Fundstrat Global’s Tom Lee said the S&P 500’s finish above its 200-day moving average for a second consecutive session on Friday represents a “massive technical recovery”.

Lee said this accomplishment represents a break in 2022’s technical pattern.

“For stocks to work into YE, the inflation crisis has to be broken. That is, we think the November CPI (December 13) will finally convince investors inflation is falling faster than expected. Falling like a rock.”

Lee sees opportunity in heavily-shorted stocks, high P/E stocks which have plunged, tech stocks hit by rising rates and small-cap stocks.

The S&P 500 could rally to between 4400 and 4500 by the end of this month, Lee said.

“Our view for 2022 was 1H would be ‘treacherous’ but in 2H, our view for markets is favourable. And given the risk-off positioning of institutional investors (see note from Monday) and given the extreme bearish retail sentiment (AAII, etc), there will be an abrupt market adjustment higher.”

Parsing the US jobs data

Ian Shepherdson at Pantheon Macroeconomics: “Wages rose at an annualised 4.8 per cent rate in three months to November, much too fast for the Fed. The trend rate of increase seems to be about stable but we had been hoping to see a clear softening.

“Even if inflation drops faster than expected over the next few months as a result of margin compression, they will be worried about a rebound in the second half of 2023 and beyond if wage growth does not slow.”

Bill Adams, chief economist for Comerica Bank: “The Fed will read the jobs report as affirming the need for additional rate hikes.”

Gina Bolvin, president of Bolvin Wealth Management Group: “It appears that the US economy has been resilient enough to take Powell’s punch. The market now hinges on December’s rate hike. Will Powell put coal in our stockings?”

Charlie Ripley, senior investment strategist for Allianz Investment Management: “While other economic data points over the past few weeks have been favourable to the Fed’s progress on the inflation front, strong employment data is clearly the biggest headwind for the Fed. Payrolls need to fall below the replacement rate in order to keep slowing the economy and despite the aggressive rate tightening thus far, the impact to the labor market has been minimal.”

Europe

Goldman Sachs is wary of European equities: “While Europe does not look extremely expensive, we would remain cautious. Indeed, we are in a recession, risks remain elevated and rates are rising.

“Moreover, European stocks are not as cheap as they were (12x fwd P/E today vs. 10x in October). We are starting to see guidance cuts and earnings being revised down.

“We expect margins pressure to materialise and forecast STOXX Europe 600 EPS -8 per cent in 2023 while bottom-up consensus expects 2 per cent. Also, with higher yields elsewhere, we think there is a case for lower valuations than the average (excluding value sectors).”

Commodities

Liberum Capital looks to the year ahead: ” While we are commodity bears, as we head into 2023 – we don’t forecast a recession globally/regionally. Our bear case is modest, featuring the passing of the post-lockdown reflation trade. Rising rates worldwide, up on inflation-targeting cash rate policies of most [central banks], simply marginalises speculators.

“While this releases some commodity supply (via derivatives; physically backed ETFs, etc.), physical demand growth remains intact. A general price floor forms mid-2023.”

Liberum cites three downsides risks: ”1. US Fed over-extends inflation-targeting rate hike cycle, undermining investment/growth, ushering in the next recession;

“2. similarly, China’s zero-covid policy could hit economic activity/investor confidence &/or its various stimulus strategies (property + infrastructure) fail to boost activity;

“3. Russia’s war continues, sapping investment activity in Europe, etc. Again though, these are merely risks to our forecasts, not actually included in our supply/demand/price forecasts.”