The inflation duration problem, market bottoms, and Wilsons' stocks to watch

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

MAJOR HEADLINES

• US stocks book 4-day losing streak ahead of jobs data as investors continue to weigh Powell remarks
• Bank of England interest rates rise 0.75bps in biggest rise for 30 years as British economy faces longest-ever recession
  
• Hedge fund giant Elliott warns looming hyperinflation could lead to ‘global societal collapse’
• Fed's Powell signals smaller rate hikes ahead but says talk of pause is very premature
• BOJ Governor Kuroda hints at tweak to ultra-low interest rates as a future option
• ECB's Nagel, Kazaks and de Cos all say rates must rise significantly
• Norges Bank hikes by 25 bp, as largely expected
• Hawkish Powell sees S&P 500 post its worst Fed-day performance since Jan-2021
• Chinese health authorities reiterate unwavering commitment to zero Covid following recent pivot speculation
• Chinese policymakers say growth still priority
• Morgan Stanley to start layoffs in coming weeks on slowdown in M&A 

THE CALENDAR

After seven consecutive months of rate hikes, tomorrow's Statement of Monetary Policy from the RBA takes on added significance. Everyone wants to know the answer to one question... "how many more rate hikes will there be in this cycle?" It a bit like asking how long is a piece of string. Lots of intelligent people will guess, some will get pretty close, and fewer still will get it right. 

At last count, the Commonwealth Bank thinks rates will rise one more time, to 3.10%, by years end, NAB expects rates to peak at 3.6% in March next year, ANZ is tipping a peak of 3.85% in May next year, whilst NAB has the most aggressive prediction of 3.85% by March next year - mind you, they thought the central bank would rise by 50 basis points this week. 

As I said, lots of guesses, and not everyone can be right. And unfortunately, the RBA probably won't give too much away tomorrow in its Statement of Monetary Policy. The statement, issued four times per year, sets out the Bank's assessment of current economic conditions and provides an outlook for inflation and output growth. My best guess is that the assessments will be somewhere along the lines of 'bad', 'high' and 'slowing', respectively. All jokes aside, it should make for interesting reading. 

The other big data point is US non-farm payrolls and the unemployment rate. Both of these data points have remained stubbornly strong, despite the impending collapse of the US economy - or so some would have you believe. If the US is to enter a recession, which is now a forgone conclusion for many analysts, and inflation is to fall, ultimately the number of jobs being created has to come down sharply and the number of unemployed needs to rise. Will tomorrow night's data points start to show these outcomes? And even if they do, how long will it take and how many people will need to lose their jobs to move the needle on inflation?

For the record, economists expect non-farm payroll growth to ease to 200,000 jobs in October, which would be the lowest number this year. The unemployment rate is forecast to tick back up to 3.6%.

THE CHART(S)

On the question of how long it will take for these outcomes to move the needle on inflation, the next exhibit is telling. It is sourced from the Daily Shot and it shows that, based on the instances observed, once inflation gets above 8%, it takes quite some time to fall - approximately two years to move back below 6%. 

Critically, history shows a very different outcome from what is predicted this time. Consensus expectations are for inflation to recede much quicker. 

This speaks to why Powell has been on record saying that the Fed will 'do what it takes' to bring inflation under control and why he hasn't been shy about pulling the trigger on 75 bp hikes. The Fed knows full well that to have any chance to get inflation under control with speed, they need to move aggressively. 

On a more positive note for all us stockmarket tragics, see the charts below. They're a little 'busy', but all you need to do is note the bottoming of the blue line (which represents the S&P 500) before all the other lines (which represent EPS, jobs, and GDP), following various major market corrections. The message is that the stockmarket, being a forward-looking beast, bottoms and recovers ahead of those other data points - and can rally in the face of bad economic news. 

All is not lost. 

THE TECHNICALS

There is plenty happening on the ASX 200 chart at the moment and there are some significant levels in play - so bear with me as I talk you through the squiggles. 

Last week I noted that with 6800 cleared, there was a fairly clean run into 7000. I then went on to say that 7000 will likely act as major technical and psychological resistance. 

Like clockwork, the bulls stalled at 7K yesterday and the market rolled over. In fact, it was a little worse than a stall. They put it into the wall at speed and the market tanked around 2% from top to tail. 

The only positive thing from here is that there is a downtrend resistance line in play that could act as a support level. We saw the same thing happen in late September/early October, with the bulls using a retest of a downtrend resistance line to launch off the lows. Let's hope they can do it again - but I wouldn't hold your breath. 

If 6800 fails to hold, we're right back in the muck that it took us the best part of a month to get out of. There's a bit to play for in the next week or so. 

Finally, today's stocks to watch comes from Wilsons, via our good friend Rudi Filapek-Vandyck from FN Arena. The strategists over at Wilsons, weighing into everything talked about above, are remaining cautious on equities for the foreseeable future because inflation remains stubbornly high and central banks are, therefore, likely to keep hiking. 

That said, they like Aussie stocks over their international counterparts and have identified Aristocrat Leisure (ASX: ALL), Santos (ASX:STO), Insurance Australia Group (ASX: IAG), Macquarie Group (ASX: MQG), National Australia Bank (ASX: NAB), Cleanaway Waste Management (ASX: CWY), Qantas Airways (ASX: QAN), Allkem (ASX: AKE), and Goodman Group (ASX: GMG) as potential buying opportunities. 

Chris Conway wrote today's report.

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