australian stocks roiled by inflation data that put a question mark on a rate cut 1322182015

Australian stocks traded weak in Wednesday’s session as official inflation figures released by the Australian Bureau of Statistics clouded the outlook on further rate cuts by the Reserve Bank of Australia. The inflation data spurred the Australian dollar higher, a negative factor for overseas investment in stocks and the country’s exports. The uncertainty on a rate cut triggered a sell-off in banking stocks, contributing to the fall in the benchmark index.

Indices and sectors

The benchmark S&P/ASX 200 on Wednesday fell 34.8 points, or 0.6 per cent, and closed at 5,837.5, while the broader All Ordinaries index was down 31.2 points, or 0.5 per cent, at 5,812.8.

The only gaining sectors on the day were telecommunications services (+0.79 per cent) and industrials (+0.46 per cent). The top losing sectors were energy (-0.97 per cent), financials (-0.94 per cent), materials (-0.66 per cent) and utilities (-0.62 per cent).

Stocks

In the energy sector, the top losing sector of the day, Woodside Petroleum Limited (ASX:WPL) ended lower by 0.49 per cent at AU$34.52, Origin Energy Ltd (ASX:ORG) plunged 2.39 per cent at AU$12.26, Oil Search Limited (ASX:OSH) was down 1.61 per cent at AU$7.96 and Santos Ltd (ASX:STO) dipped 1.78 per cent to AU$7.96. Ratings agency Standard and Poor’s downgraded Origin Energy from BBB to BBB-, the lowest “investment grade,” citing the deteriorating profitability of the company’s LNG operations due to falling global energy prices, according to the ABC.

Mining stocks lost ground in yesterday’s trading. BHP Billiton Limited (ASX:BHP) lost 1.08 per cent to AU$30.27 as investors noted that the company raised its iron ore production guidance again in the face of falling ore prices. The company deferred further spending on debottlenecking its Port Hedland inner harbour, saying its existing infrastructure continued to “exceed expectations.” As a result, BHP’s 290 million tonnes per year expansion would take longer to complete, but would cost less.

The Sydney Morning Herald reported this morning that BHP’s decision to defer iron ore spending caused a sharp rise in iron ore prices, which rose 5.9 per cent to US$54.04 a tonne, the largest gain seen since October 2012.

Rival Rio Tinto Limited (ASX:RIO) lost 0.5 per cent to AU$55.20, but Fortescue Metals Group Limited (ASX:FMG) ran against the tide and shot up 1.87 per cent to AU$1.90.

Global ratings agency Standard and Poor’s cut Fortescue Metals Group Limited (ASX:FMG)’s ratings from BB+ to BB, indicating the company is “less vulnerable in the near term but faces major ongoing uncertainties to adverse business, financial and economic conditions,” and citing plunging iron ore prices.

The four major banks all ended up in the red. Commonwealth Bank of Australia (ASX:CBA) lost 0.72 per cent to AU$91.12, Westpac Banking Corp (ASX:WBC) was down sharply by 1.29 per cent to AU$38.29, Australia and New Zealand Banking Group (ASX:ANZ) fell 0.76 per cent to AU$35.49 and National Australia Bank Ltd. (ASX:NAB) was down 1.22 per cent to AU$38.11.

Amongst retailers, Wesfarmers Ltd (ASX:WES), the owner of supermarket chain Coles, was down 0.68 per cent to AU$42.45, Woolworths Limited (ASX:WOW) fell 0.35 per cent to AU$28.26 and Myer Holdings Ltd (ASX:MYR) declined 0.38 per cent to AU$1.33.

In telecommunications stocks, excepting Telstra Corporation Ltd (ASX:TLS) which gained 0.97 per cent to AU$6.25, other stocks ended with losses. TPG Telecom Ltd (ASX:TPM) was down 1.48 per cent to AU$9.35, iiNet Limited (ASX:IIN) fell 0.81 per cent to AU$8.59 and Macquarie Telecom Group Ltd. (ASX:MAQ) was flat at AU$5.28.

Economic news, currency and insight

Consumer Price Index data, an important measure of inflation in the economy, released by the Australian Bureau of Statistics for the month of March showed that the annual rate of inflation was 1.3 per cent, its slowest rate of growth in over three years, and in line with analysts’ expectations, according to The Australian. However, the underlying rate of inflation rose 0.6 per cent in the March quarter, bringing its annual rate to 2.35 per cent, an approximate mid-point within the RBA’s targeted inflation rate of 2 – 3 per cent.

“I don’t think it’s going to take the RBA’s easing bias away, there’s still a chance they will cut in May,” said NAB senior economist David de Garis, as quoted by The Australian. “It doesn’t suggest there’s any undue economic softness, so it does reduce the chance of a May interest rate cut by a little bit, on top of the other economic numbers that we’ve had over the past couple weeks,” he added.

After a 0.3 per cent increase in February, the Westpac-Melbourne Institute’s leading index slid 0.3 per cent in March, indicating that the economy would likely struggle during the rest of the year as businesses and consumers continue to hold back on spending, resulting in below-trend economic growth, according to RTT News.

“The below-trend signal is in line with Westpac's expectation for sluggish economic growth of around 2.5 per cent for the remainder of 2015,” Westpac chief economist Bill Evans said. 'With the sharp fall in commodity prices; a resilient Australian dollar; and a disappointing outlook for business investment it seems likely that the board will decide to cut rates by 25 basis points at the May meeting,' he added, according to Sky News.

On Wall Street, stocks ended with net gains despite trading choppy through yesterday’s session, as investors tried to cope with a mixed bag of first-quarter earnings reports. The Dow Jones Industrial Average rose 89 points, or 0.5 per cent, to 18,038.27. The S&P 500 gained 11 points, or 0.5 per cent, to 2,107.96, and the Nasdaq Composite Index added 21 points, or 0.4 per cent, to 5,035.17.

The Australian dollar continued to rule firm and clung on to most of the gains it accrued on Wednesday after the release of inflation data that raised a doubt on further interest-rate cuts. At 07:00 this morning (AEST), the local currency was trading at 77.56 US cents, down a tad from 77.78 US cents on Wednesday, according to the Business Spectator.

The Australian stock market is likely to open higher today given that at 06:45 this morning (AEST) the June ASX SPI200 Index (AP) Futures were trading up by 11 points at 5,835.0.