ASX 200 to rise + US Federal Reserve pauses rate hikes but does not rule out more

ASX 200 futures are trading 20 points higher, up 0.28% as of 8:30 am AEST.

S&P 500 SESSION CHART

Deeper Dive

The Fed kept rates steady at 5.0% to 5.25% after 10 consecutive hikes, in-line with consensus expectations. The press release noted "holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy."

The main takeaways from the Fed's economic projections included:

• Dot plot terminal rate jumps to 5.6%
• The above implies two more rate hikes
• GDP growth outlook upgraded from 0.4% to 1.0%
• Unemployment expected to stay low at 4.1% by year end (3.7% now)
• Core inflation expectations higher at 3.9% by year end (from March projection of 3.6%)

Powell's post-FOMC press conference highlights:

• More hikes to come: "Nearly all Committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year, but at this meeting, considering how far and how fast we've moved, we judged it prudent to hold the target range steady."
• Inflation risks: "I still think ... that the risks to inflation are to the upside still. So we don't think we're there with inflation yet ... what we'd like to see is credible evidence that inflation is topping out."
• Tricky core inflation: "If you look at core PCE inflation overall, over the last six months, you're not seeing a lot of progress. It's running at a level over 4.5%, far above our target and not really, you know, moving down. We want to see it moving down decisively, that's all."
• No cuts: "Not a single person on the Committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate."

Other things you should know:

• The market is no longer pricing a cut this year but it's also not yet pricing in a second hike, according to CME's Fedwatch Tool
• Rate hikes tend to hit company earnings with an approximate 17 month lag. The most aggressive tightening cycle should begin to follow through in the second half of 2023
• Then again, stocks tend to bottom out before earnings
• One of the reasons why the Fed can't hike too aggressively is that unrealised losses at FDIC-insured banks totaled around US$500bn in the first quarter of 2023

Coal: Weak prices, mixed outlook for stocks

Nothing says a bear market in commodities quite like a call from Citigroup which suggests global gas prices could fall 50%. That also spells trouble for thermal coal prices, which could trade at just 1/4 of its December 2022 levels in the coming three months.

The ASX has two major thermal coal plays - Whitehaven Coal (ASX: WHC) and New Hope Coal (ASX: NHC). And although both companies play in the same commodity, Citi has reached two very different valuations on those companies.

Provided its forecasts are right, Citi's Whitehaven FY23 EBITDA forecasts have been slashed by 49% and FY24 EBITDA could be down by as much as 43% on top of that. And yet ... Whitehaven is a high-risk BUY at Citi with a $7.80 target price.

New Hope Coal's EBITDA forecasts are slashed by 25 and 24% respectively for FY23 and FY24. And yet, it moves to a SELL rating with a $4.0 target price.

Quote of the Day: Tech > Oil

Today's top investor quote comes from Chris Iggo of AXA Investment Management. Iggo is not always the first to jump on a bullish trend but he is one to know a trend when he sees it.In a recent note sent to clients, he noted that the huge rally in the NASDAQ means more than just a 40% surge since October 2022's lows.

It may actually be more a symbol of American exceptionalism.

For anyone that's short the US market, that's rough."There are always storm clouds for markets. Yet maybe we are in a period of reassessment ... The pain trade, as I discussed with a good contact at one of the investment banks last week, might be that markets keep performing. If you are short, that hurts."

It will not surprise you then when I tell you what the note was called - Better Tech than Oil.

Key Events

ASX corporate actions occurring today:

• Trading ex-div: Incitec Pivot (IPL) – $0.10
• Dividends paid: ResMed (RMD) – $0.044, Dalrymple Bay Infrastructure (DBI) – $0.05, Waterco (WAT) – $0.05
• Listing: None

Economic calendar (AEST):

• 11:30 am: Australia Unemployment Rate
• 12:00 pm: China Industrial Production
• 12:00 pm: China Fixed Asset Investment
• 12:00 pm: China Retail Sales
• 10:15 pm: ECB Interest Rate Decision 

This Morning Wrap was first published for Market Index by Kerry Sun and Hans Lee.