Brokers split on ASX lithium stocks + Your guide to Budget II, 2022

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

S&P 500 TECHNICALS

MAJOR HEADLINES

• Most in NABE survey say US economy already in a recession or will be soon
• China Q3 GDP growth tops forecasts but rebound remains underwhelming, Sep activity data mixed
• Eurozone PMI shows economic contraction intensifies
• UK flash composite PMI contracts for third straight month
• Australia to cut economic growth forecasts on lower consumer spending
• Hong Kong, China stocks down big after Xi tightens grip at party congress
• UK bonds rally on thoughts Sunak best equipped to deal with fiscal challenges
• South Korea assets rally after government pledges $35B to prop up credit markets
• China imposes Covid curbs in Guangzhou, a manufacturing hub home to 19 million
  
• Sunak favorite to be UK PM after Johnson drops comeback bid
• Hunt's budget could hit high earners with £20B of tax rises
• Hunt to propose 'stealth' income tax rise in bid to fill £40B fiscal hole 
• ECB in no mood to slow aggressive pace of interest rate hikes 
• European natural gas below €100 for first time since June 

YOUR GUIDE TO BUDGET 2022

What's better than one Budget in a year? Two of them. Labor's Jim Chalmers will hand down his first Budget at 7:30pm AEDT. All the leaks so far suggest this will be a run-of-the-mill Labor budget. 

Investors will be watching for three major things:

• Are there plans to shelve the Stage Three tax cuts? What will happen to the Low and Middle Income Tax Offset?
• Labor has opened the door to place a $5 million limit on the amount people can accrue in superannuation. Will they go ahead?
• And what could a housing "Future Fund" look like?

Those questions - and a few more - will be answered in primetime tonight. 

THE QUOTE

"We would argue that the RBA has consistently got housing market movements wildly wrong since 2013, when it failed to anticipate the huge housing boom that emerged following aggressive interest rate cuts."

There is no prize for guessing who wins our quote of the day - Christopher Joye of Coolabah Capital. Joye has penned a scorching piece on the RBA's housing forecasts (spoiler: They haven't been all that accurate) and how the assumptions haven't kept up with the reality of how interest rate hikes really affect Australian house prices. Forecasts are not a perfect science, but it is important to get the general magnitude and direction correct. Joye argues their faux-inverse RBA trade has worked out beautifully.

THE CHARTS

If you read Joye's piece, then you'll know he referenced a 100+ page document which is now live on the Reserve Bank's website. The document is a collection of emails, presentations, and unreleased forecasts about the effect interest rate hikes would have on house prices.

And these two charts highlight the worst case scenario - what would happen if the Reserve Bank hiked interest rates by 100 basis points? The answer suggests a long-term fall in house prices, possibly as much as a full percentage point drop in the housing price-to-income ratio. Incidentally, that ratio has more than doubled since the early 1990s. It's just another way of showing how unaffordable Australian housing is compared to the relative rise in incomes.

Even more remarkable, this is a model which assumed the housing market was in equilibrium when it started (that is supply equals demand perfectly). Of course, the housing market has not been in equilibrium for a long time. In addition, a 100 basis point rate hike would cause challenges in other areas of the economy that are not housing. Hence, this is why it's a "worst case" scenario. But it's always fun to play hypothetical, right?

STOCKS TO WATCH

Today, it's all about lithium. Partially because of Allkem (ASX: AKE)'s quarterly earnings report and partially because of an upgrade from Morgans which we will touch on shortly.

Allkem's September quarter report was released late last week, with production up 17% on the previous corresponding period. Sales topped US$150 million at a margin of - get this - 89%. In its outlook statement, management said demand and pricing should remain relatively stable through this quarter. No wonder Rio Tinto is (apparently) looking to muscle in on the lithium trade.

Citi, Macquarie, UBS and Ord Minnett all have the company as "buy" or "outperform" rated - though it needs to be said Ords was disappointed with the report and in particular, a growing list of company-specific headwinds.

Morgans and Morgan Stanley have the company on hold, with the result actually underperforming Morgans' expectations. Both believe macro headwinds may impact the price of lithium more than management is saying.

Credit Suisse has the sole underperform rating, arguing prices were softer than expected. Having said this, it does expect a correction in the price of lithium next year.

And speaking of lithium, Morgans has upgraded Novonix (ASX: NVX) to speculative buy from hold over the news the US Department of Energy may be about to gift the Australian company a big grant for its US-based facility. 

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