Inflation bump spurs bond markets & Aussie dollar: ASX closes flat

Market Reports

by Melissa Darmawan

The local bourse poked its nose over the finishing line for the fourth time in five sessions as inflation figures took the spotlight. At the closing bell, the S&P/ASX 200 was 0.1 per cent or 5 points higher at 7,449.

The headline figure came in at 0.8 per cent coming in at expectations. The annual rate came in at 3.0 per cent versus 3.1 per cent, down from 3.7 per cent from the second quarter. However, the core consumer price index reading was a bit of a surprise. The Reserve Bank’s preferred measure of core inflation rose to its highest level since 2015. The annual rate came in at 2.1 per cent as per the Australian Bureau of Statistics versus the expectations of 1.8 per cent. For the quarter, it came in at 0.7 per cent versus an expectation of 0.5 per cent.  The reading slipped back into the RBA’s target band of two to three per cent, a benchmark used by the central bank for raising its cash rate.

The three year bond yield spiked up 16 basis points after investors digested the data amid the Aussie dollar going into a spin. A move that isn’t unfamiliar with market participants around the globe.

Bond yields have been jumping up and down on inflation jitters, with its performance being quite pronounced in the past month. The compounding effects of the energy crunch in the northern hemisphere amid the supply chain bottlenecks hasn’t helped. Investors have been trying to price in the next moves ahead of the central banks’ formal rate and tapering announcements.

Fuel and home dwellings were major contributors to the jump in the consumer price index, as oil producers and home builders were outpaced by consumer demand pressured further by rising material costs. Weighing down on this is shortage in staff and restrictions imposed by the rising cases of delta. A similar tune that we saw this morning on Wall St as new home sales rose at its fastest pace. Home prices have been climbing factoring in the rising costs of materials.

The reading comes after Governor Philip Lowe reiterated that the central bank will not look to raise interest rates to 2024. Dr Lowe said that he wants to see inflation and wage growth 'sustainably' within the two to three per cent target range. Let's see what the RBA's outlook will be when they meet next Tuesday on Melbourne Cup day. If they turn more hawkish we might see another spur in the bond markets and Aussie dollar again.

Despite the cautious performance, communication services fared the best, rising 1.9 per cent lifted higher by news from Telstra. Healthcare notched a gain of 1.1 per cent followed by financials, as banks were the beneficiary of rising bond yields. Consumer staples fell 2.0 per cent dragged down by Woolworths (ASX:WOW) and A2 Milk (ASX:A2M) followed by utilities.

Woolworths (ASX:WOW) plunged 3.2 per cent, its sharpest drop since February. Investors booked their profits after they got the jitters on an uncertain outlook as a lift in restrictions had already put a dampener on consumer spending at their stores. Meanwhile sales in Big W was on the rebound.

The A2 Milk company (ASX:A2M) plummeted 12 per cent after the company warned of continued challenges with sales in China at their investor day.

The major miners closed in the red amid the iron ore futures pointing to a fall. Fortescue Metals (ASX:FMG) sunk 2.6 per cent, Rio Tinto (ASX:RIO) slid 1.8 per cent while BHP (ASX:BHP) closed 1.4 per cent lower.

Tonight, investors will turn to Wall St as earnings season continues. Tech titans like Alphabet and Microsoft reported after market close so we will see how the major indexes will respond. Apple will be in focus along McDonalds and how the Dow performs, Boeing plus many more are on tap to report quarterly earnings.

Futures

The Dow Jones futures are pointing to a rise of 17 points.
The S&P 500 futures are pointing to a rise of 3 points.
The Nasdaq futures are pointing to a rise of 3 points.
The SPI futures are pointing to a rise of 5 points when the market next opens.

Best and worst performers

The best-performing sector was Communication Services, up 1.9 per cent. The worst-performing sector was Consumer Staples, down almost 2 per cent.

The best-performing stock in the S&P/ASX 200 was Uniti Group (ASX:UWL), closing 5.8 per cent higher at $4.20. It was followed by shares in Reliance Worldwide (ASX:RWC) and Whitehaven Coal (ASX:WHC).

The worst-performing stock in the S&P/ASX 200 was Codan (ASX:CDA), closing 18.8 per cent lower at $10.95. It was followed by shares in The A2 Milk Company (ASX:A2M) and Champion Iron (ASX:CIA).

Asian markets

Japan's Nikkei has lost 0.4 per cent.
Hong Kong's Hang Seng has lost 1.5 per cent.
China's Shanghai Composite has lost 0.9 per cent.

Commodities and the dollar

Gold is trading at US$1787.14 an ounce.
Iron ore is 2.7 per cent higher at US$122.30 a ton.
Iron ore futures are pointing to a fall of 0.7 per cent.
Light crude is trading $0.71 lower at US$83.94 a barrel.
One Australian dollar is buying 75.21 US cents.

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