The Match Out: Softer Inflation data should mean the RBA stays on hold

A choppy session for the ASX today with a lot of company news met with key economic data. A weaker open, although better results from key US companies aftermarket saw US Futures rally which provided some support to local stocks, before the recovery really got underway post the inflation data at 11.30 am where the RBA’s preferred measure of prices came in a touch below expectations, and this reduces the chance of another hike in May.

• The S&P/ASX 200 lost -5pts points / -0.08% to close at 7316
• Energy (+0.88%), Industrials (+0.82%) & Communications (+0.39%) the standouts today.
• Utilities (-1.12%) and Materials (-0.71%) the biggest drags
• Headline inflation fell to 7% in the March quarter, slightly above the 6.9% expected, however, the RBA’s preferred trimmed mean slowed to 6.6%, a shade below consensus of 6.7%.
• Inflation in the cost of building a new dwelling is the largest item in the CPI basket, and that slowed to 13%, down from a peak of 21% last year.
• Prices increased by 1.2% within the March quarter itself, which was actually the softest quarterly read in a year and adds further weight to our calls that inflation has peaked and therefore interest rates have peaked.
• ANZ said the read supports its view that the RBA will keep the cash rate at 3.6% in May, Deutsche Bank changed its call from a hike to now a pause, while David Bassanese over at Betashares said there is a good chance now that the RBA won’t need to raise interest rates again this year.
• Bond markets agreed with the Aussie 3-year yield dropping 0.19% while the 10-year yield fell 0.15%.
• All of this supports MM’s view that the RBA will sit on their hands in May, we simply cannot understand how some in the market are calling one more hike (still) when the data has gone in the RBA’s favour since they paused in April following the most aggressive tightening in history. One more does not make any sense!
• UBS upgraded Xero (ASX: XRO) +1.30% to a buy and $109 price target – we own and agree with their positive rhetoric.
• Interesting to see Macquarie who was on the ticket for the Star Entertainment (SGR) -4.20% capital raise, downgrade their client to neutral & $1.35 PT. The raise price was $1.20…
• Mineral Resources (ASX: MIN) -9.67% was whacked after downgrading Mt Marion production while they also flagged delays to expansion projects which hurt their mining services division. We own MIN and it has a -0.40% influence on our Flagship Growth Portfolio today.
• Stockland (ASX: SGP) +2.58% rallied after maintaining FY23 guidance, with the usual caveat that market conditions remain uncertain.
• Kogan (ASX: KGN) +7.22% rallied on a reasonable 3Q update which came with a surprise buyback.
• Bowen Coking Coal (ASX: BCB) +4.17% reported positive operating cash flow of $2.4m, a positive result for the first time + it would have been better but for a delayed $15m payment for coal sold during the quarter. We own BCB in our Emerging Companies Portfolio.
• Gold stocks enjoyed overnight strength in the Gold price – Evolution (ASX: EVN) a standout up 3.49%, Northern Star (ASX: NST) +1.47% and Newcrest (ASX: NCM) +1.68% also did well.
• Iron Ore was down ~0.5% in Asia and is trading at $US106/dmt, Citi says it remains bearish on iron prices as it downgraded its 3-month price target to $US100 a tonne from $US120 a tonne
• Gold was subdued in Asia at $US1997 at our close.
• Asian stocks were mixed, Hang Seng up +1.12%, the Nikkei in Japan fell -0.73%, while China was flat
• US Futures are up, the Nasdaq the best of them +1.3%.
• US stocks we own that reported aftermarket included Microsoft (MSFT US) & Chipotle Mexican Grill (CMG US) – both were strong after hours.

ASX 200 - Intraday

ASX 200 - Daily

Mineral Resources (ASX: MIN) $72.59

MIN -9.67%: Had issues on two main fronts today, downgrading production guidance at their Mt Marion Lithium mine which has a flow on impact to costs & sales, while they also cut full-year production guidance for its core mining services division due to delays with approvals. Iron Ore production for the quarter came in at 4.5 million tonnes (+10%) with their realised price of $US109/mt representing a modest 13% discount to the benchmark – similar to the trends seen at FMG. They maintained FY guidance for Iron Ore.

• This is not great news for MIN, particularly against a backdrop of a weaker Iron Ore price + the expansion of Mt Marion, which they said was in line with budget.  

Xero (ASX: XRO) $93.57

XRO +1.3%: UBS upgraded Xero to a buy today, saying that with management's pivot to "balancing growth and profitability" announced in early March, they see scope for XRO's Free Cash Flow (FCF) to surprise over the medium term, jumping from their estimate of $19m in FY23 to $339m by FY26e, while also expanding FCF margins materially. In simple terms, they think XRO will provide better growth, has more cost levers to pull to drive earnings and is trading on the cheap side relative to its own 5-year average (all tech is) but more importantly, to its peer group.

• UBS are now buy-rated with a $109 price target – other analyst calls are below.

Kogan.com (ASX: KGN) $3.86

KGN +7.22%: a strong move higher for the e-commerce business on a reasonable 3Q update which came with a surprise buyback. Adjusted EBITDA for the quarter was $4.4m, which compared to a $4.4m loss in the first half, benefitting from an improved inventory position. Inventory has now fallen to $78.3m, around 20% down from the end of 2022. Despite sales falling 28% yoy, gross margins improved as Variable & Marketing costs fell from 10% to 8.1% of total sales. The main kicker was the buyback which aims to purchase 10% of shares on issue which comes despite the company noting a softer outlook of reduced consumer demand and a cash balance of $49.1m which was down in the quarter.

Broker Moves

• Xero Raised to Buy at UBS; PT A$109
• Viva Energy Cut to Neutral at JPMorgan; PT A$3.35
• Ridley Rated New Buy at Moelis & Company; PT A$2.58
• Fortescue Raised to Reduce at CLSA; PT A$20
• Nanosonics Rated New Buy at William O'Neil
• Star Entertainment Cut to Neutral at Macquarie; PT A$1.35
• Bluescope Cut to Neutral at JPMorgan; PT A$22
• BHP Raised to Add at Morgans Financial Limited; PT A$50.40

Major Movers Today

Enjoy your night
The Market Matters Team

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