ASX edges higher ahead of US inflation data

Mining giants Rio Tinto and BHP ended the day in the red with small losses, while CBA was the only big bank to close lower, on the eve of releasing its results for the December half.

Online homewares and furniture group Temple and Webster suffered a 19 per cent loss after it revealed a 46.7 per cent fall in profit after tax for the first half of the financial year.

Embattled Star Entertainment Group shares continued to fall after its 20 per cent loss on Monday spurred on by its dire market outlook in which it warned that the NSW government’s proposed tax changes would force it to “undertake an urgent review” of the Sydney operations and assets. The group is down 13.47 per cent to $1.28.

The lowdown:

The ASX followed gains on Wall Street to finish higher, but mixed company earnings reports and lower consumer confidence data would have had an effect on the market, said Saxo Markets analyst Jessica Amir.

“Consumer confidence in Australia deteriorated, while business confidence improved so we continue to get mixed signals from our economy, and that’s what makes it really hard for the Reserve Bank of Australia to kind of gauge what to do with interest rates.”

As the US consumer price index report loomed, the new methodology behind how it’s calculated could result in hotter-than-expected data, Amir said.

“The market is expecting to see inflation is continuing to slow. But, we’ve seen a bit of portfolio shifting ahead of this US inflation report,” she said.

“There’s a lot of risk coming out of the market because people are kind of hedging their bets in case US inflation is hotter than expected.”

The method used to calculate CPI has had many revisions over the years including changing biases that led to CPI overstating the inflation rate. From January 2023, CPI data will be a transition to yearly weights instead of the previous two years.

High inflation and the Federal Reserve’s response to it with higher interest rates have been at the centre of Wall Street’s sharp moves for more than a year. The Fed has aggressively raised rates to their highest level since the dawn of the Great Recession to drive down the worst inflation in generations. High rates can stamp out inflation, but they do so at the risk of sending the economy into a sharp recession and dragging on investment prices.

Economists expect the report to show inflation slowed to 6.2 per cent in January. That would be down from 6.5 per cent a month before and from a peak of more than 9 per cent in the summer.

All the worries about inflation and rates are happening against the backdrop of a decidedly lacklustre earnings reporting season. Companies in the S&P 500 are on track to report a nearly 5 per cent drop in earnings for the final three months of 2022, compared with a year earlier, according to FactSet.

By the count of strategists at Credit Suisse, this is shaping up to be the worst earnings reporting season outside of a recession in 24 years.

Pessimism is also building about earnings for the first three months of 2023, with forecasts coming down.

A continued decline in corporate earnings is one of the reasons strategists at Morgan Stanley are cautious about the rally stocks have made since the start of the year, even if they gave some back last week. The S&P 500 is up around 8 per cent for 2023 so far, though it remains stuck in its “bear market” after falling more than 20 per cent from its high last year.

“Price action is not reflective of the deteriorating fundamentals or the fact that the Fed is hiking during an earnings recession — drivers that should ultimately determine the lows for this bear market later this spring,” the strategists led by Michael Wilson wrote in a report. “Risk-reward is as poor as it’s been in our view.”

Quote of the day:

Seven West Media chief executive James Warburton has declared none of his new long-term broadcast deals will become onerous, despite his television network facing increased competition for eyeballs against streaming platforms and widespread fears of a recession.

“We will not have onerous contracts moving forward,” Warburton said. “We’re clearing out the last of the cricket and then … we’ll not have any onerous contracts on our books.”

Tweet of the day:

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Property group Dexus has earmarked growth in funds management, a rise in demand for its alternative asset funds and a return to the office in capital cities to help boost rents as primary engines of growth amid ongoing economic volatility.