ASX closes lower after hot US CPI, snaps week-long winning streak

The inflation data out of the US on Thursday offered a sobering reminder that we remain entrenched in the higher-rates-for-longer paradigm, with profound yet only gradually unfurling consequences for asset valuations. A weak 30-year US treasury auction underscored that point.

In September, core services inflation rose at its fastest pace since February, with Coolabah’s estimate of the annualised trend picking up to 5.5 per cent. This is multiples of the US Federal Reserve’s 2 per cent target.

Unsurprisingly, US 10-year government bond yields were on the march again, shooting up from 4.55 per cent on the open to 4.69 per cent. The S&P500 Index duly lost 0.62 per cent on the day.

The calculus here is simple. Global unemployment rates are near all-time lows. Global wage growth is consequently brisk. Global labour productivity is exceptionally poor because businesses are employing too many people for the products they are purveying.

This means that wages minus productivity, or “unit wage costs”, are rising at a highly inflationary rate of 7-8 per cent in Australia and New Zealand, and 6-7 per cent in Europe. In the US, the unit wage cost story is more benign at 3-4 per cent. But to get inflation back to central banks’ 2 per cent targets, unit wage cost growth needs to be at a similar level, which it is not.

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Fletcher Building has accused Western Australia’s largest home builder, BGC, of blame-shifting and making unfounded allegations over plumbing pipe leaks in 11 per cent of new houses built in the state between 2017 and 2022 that used a Fletcher product.

Fletcher Building chief executive Ross Taylor said a detailed study by Fletcher and external experts had found it was poor installation of the Iplex Pro-fit thin pipes in new houses, and generally lower governance standards for the plumbing industry in WA compared with other states, that were the core issues.

“This is a Perth issue, not a national issue,” Mr Taylor said at a briefing on Friday. He said 17,500 houses had been built by different builders in WA over the five years using the Pro-fit pipes, and 65 per cent of them had been constructed by BGC.

He said 15,000 homes built on the east coast of Australia where Pro-fit pipes were installed had a leakage rate of 0.19 per cent. The failure rate in Perth was much higher at 10.9 per cent.

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Shareholders in Australia’s biggest gold miner, Newcrest, have overwhelmingly voted in favour of a $26.2 billion merger with US gold mining giant Newmont.

Almost 92 per cent of shareholders voted to support the deal via proxy votes lodged before the meeting on Friday, five months after Newmont improved a scrip offer that values Newcrest shares at $29.29 – almost double the $15.81 the stock fetched in September last year.

The acquisition of Australia’s biggest gold miner will extend Newmont’s lead as the world’s biggest gold company. Two existing Newcrest directors will join the Newmont board as part of the merger “but they haven’t been decided”, Newcrest chairman Peter Tomsett told the shareholder meeting.

Tomsett told reporters after the meeting that he would not be nominating for a seat on the board.

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The Australian Office of Financial Management will next week sell a new 31-year bond as it extends its debt maturity profile. It has appointed Barrenjoey Markets, Commonwealth Bank of Australia, JPMorgan, UBS and Westpac to jointly manage the syndicated issue.

It is the first time Barrenjoey Markets has been appointed to a key role in a government bond issue.

The Treasury bond will mature in June 2054, making it the AOFM’s longest-dated security in circulation. The funding arm of the government last sold a new benchmark in April, when it raised $17 billion in December 2034 bonds. The new 2054 is not expected to fetch as much because of the long maturity.

The AOFM’s longest-dated bond on issue is the 2051, trading at 4.9 per cent, which is equivalent to 40 basis points over the 10-year exchange for physicals (EFP) rate.

Australian shares are following Wall Street lower, after hotter than expected US inflation data renewed bets that the Federal Reserve is not yet done lifting interest rates.

The S&P/ASX 200 is 22.2 points, or 0.3 per cent, down to 7040.6. The All Ordinaries was also down 0.3 per cent.

Rate-sensitive companies were sold off with real estate and tech the worst performing of the 11 sectors to both be down around 1.5 per cent. Healthcare stocks were the only group to move meaningfully higher to be up 0.9 per cent, buoyed by 1.9 per cent gain in CSL.

Meanwhile, the local currency plunged 1.6 per cent overnight below US64¢ and is trading at around US63.13¢, with the US dollar set to post its best session in five weeks.

US CPI hot; China CPI flatlines

The US sharemarket turned lower, with the S&P 500 down 0.6 per cent, after US core consumer prices, which exclude food and energy, rose 0.3 per cent last month. Headline prices were 0.4 per cent higher. Both metrics were forecast to rise 0.3 per cent.

The year-on-year growth rate held at 3.7 per cent, whereas economists had forecast a drop to 3.6 per cent.

“I think the [Fed’s policy committee] would look at this and still conclude that underlying inflationary pressures remain too hot for their liking,” Scotiabank’s Derek Holt said.

The yield on the US 10-year note surged 13 basis points to 4.69 per cent at 4.30pm in New York. The two-year yield, more sensitive to rate moves, reached 5.07 per cent, and the 30-year yield was at 4.86 per cent.

Elsewhere, China’s consumer inflation rate unexpectedly flatlined in September while producer prices continued to fall, adding to concerns about whether more support is needed to sustain economic growth.

The consumer price index was unchanged last month from a year earlier, the National Bureau of Statistics said Friday, weaker than expectations for a slight increase.

Producer prices fell 2.5 per cent after a 3 per cent decline in August.

Stocks on the move

Pact Group shares edged 0.3 per cent higher after the company’s board urged shareholders to reject a buyout offer from majority stakeholder and billionaire businessman Raphael Geminder.

ResMed is trading 2.6 per cent lower and near its 52-week low following a note from brokers at RBC, which downgraded the stock to perform from outperform.

Sky Network Television was up 11 per cent after the dual-listed New Zealand pay TV provider confirmed it was in buyout talks with an unnamed third party.

Bega Cheese is up 2.9 per cent after analysts at Bell Potter upgraded the foods business to a buy rating.

Perpetual is up 2.4 per cent after news its assets under management held steady in the September quarter.

Harvey Norman shares, which trade ex-dividend as of today, are down 3.9 per cent.

Fletcher Building has denied allegations levelled at it by BCG that failures with the company’s plumbing equipment in Perth were the result of manufacturing faults. Shares remain in a trading halt and last traded at $4.45.

Read Before the Bell here.

With Bloomberg.

Rich Lister Mark Creasy has upped his major stake in gold and base metal explorer Azure Minerals.

Creasy’s Yandal Investments bought $16 million of shares in Azure earlier this week, bringing its total stake to 13.2 per cent, from 12.1 per cent, according to documents lodged by the company today.

Until early 2020, Azure’s principal exploration focused on gold, copper, silver and zinc in Mexico, but since the onset of the COVID-19 pandemic in 2020, the company has transitioned back to Australia with the acquisition of a number of gold and base metal projects in Western Australia.

Creasy graduated from Britain’s Royal School of Mines and moved to Australia in 1964, where he’s been prospecting almost ever since.

His wealth has surged into three-comma territory over the past couple of years thanks to his roughly 10 per cent stake in IGO, a diversified mining group benefiting from the battery-driven nickel and lithium boom.

Australia’s economy will not be derailed by the slowdown in China, thanks to a strong appetite for the country’s high-quality commodities, according to a survey of economists.

China set a modest economic growth target of “around” 5 per cent this year, but there are doubts it will meet that after three years of harsh COVID-19 restrictions. However, reports that Beijing is considering a 1 trillion yuan ($137.1 billion) infrastructure package is good news for iron ore.

“We do not believe the China slowdown represents a large threat to Australia,” said Ben Jarman, chief economist for Australia at JPMorgan.

Economic shocks in the Asian giant had had little impact on Australia in the past years, thanks to its natural resources which were relatively cheaper compared with the rest of the world, Mr Jarman said. “So supply is rationed further out the cost curve before Australian exports are impacted.”

China is this country’s biggest customer of commodities, particularly iron ore. But Australia’s buyer list for the key steel-making ingredient is expanding.

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Between the awful stories emerging from Israel and Gaza, the seemingly inevitable failure of the Indigenous Voice to parliament referendum and a grim reading on the state of Australia’s energy transition, it’s been a depressing and exhausting week.

So investors could be forgiven for missing an important anniversary on financial markets: it’s one year since the S&P 500, the global proxy for risk, hit its recent bear market low.

Since then, the index is up 22 per cent, and for all the drama of the past 12 months – the collapse of FTX, the US regional banking crisis, the global flight against inflation – sits just 9 per cent off its all-time highs.

It raises a fascinating question: has the world become less risky since that market bottom?

For Ray Dalio, billionaire investor and the founder of US hedge fund giant Bridgewater Associates, the answer is a resounding no.

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China’s consumer inflation rate unexpectedly flatlined in September while producer prices continued to fall, adding to concerns about whether more support is needed to sustain economic growth.

The consumer price index was unchanged last month from a year earlier, the National Bureau of Statistics said on Friday, weaker than expectations for a slight increase.

Producer prices fell 2.5 per cent after a 3 per cent decline in August. Factory-gate deflation has persisted for the past year, although it has been easing in recent months.

The flat consumer prices in September were due to a high base of comparison with last year, said Dong Lijuan, chief statistician with the NBS, in a statement accompanying the data. She attributed slower growth in food prices to ample supply before the Golden Week holiday.

The data comes amid lingering concern over China’s economy, which still faces drags from a property crisis and weak confidence – issues that are weighing on everything from stocks to commodity prices. Chinese consumers travelled and spent less over Golden Week than the government had hoped, while lukewarm home sales stirred concerns about whether more support will be needed to bolster growth.

Earlier this week, Bloomberg News reported that the government is considering raising its budget deficit for the year as part of a plan to spend more on infrastructure – a form of stimulus to help the economy meet an official growth target of about 5 per cent.

The IMF recently cut its growth forecast for China for this year to 5 per cent from 5.2 per cent, and for next year to 4.2 per cent from 4.5 per cent. The economy is losing momentum because of declines in real estate investment and housing prices that endanger government revenues from land sales, as well as weak consumer sentiment, according to the fund.