AGL leads ASX higher, Chinese markets gain despite horror deflation numbers — as it happened

The Australian share market had a fairly stable trading day today, despite some horrendous consumer price figures out of China.

Capital.com's Kyle Rodda believes the Chinese data ended up being viewed as a mild positive for stocks, even though it showed the biggest deflation in China since the global financial crisis.

"While a very concerning sign for China's economy, which could be becoming entrenched in a debt and deflation cycle, the markets arguably responded in a positive way to the news," he noted.

"Perhaps markets see the terribly low number as a potential catalyst for more muscular monetary or fiscal stimulus from the central government, which, up until this point, has been moderate in applying countercyclical policy."

While Hong Kong's Hang Seng was more than a per cent lower, Shanghai was up 0.7% shortly before 5:00pm AEDT and Shenzhen was up 2.5%.

The ASX 200 index finished 0.3% higher at 7,639 points, which is pretty much where it was after the first half hour of trade.

In the black were 114 companies, while 76 were in the red and 10 finished flat on yesterday's close.

AGL's 10.3% gain on a better-than-expected half-year profit and outlook led utilities 1.1% higher, with consumer cyclicals, financials and real estate also gaining strongly.

However, not all real estate related firms were doing well today — REA Group was the top 200's biggest loser, down 4.2%.

Energy and consumer non-cyclicals were the biggest sector losers, while mining was broadly flat.

That's it from me today. I've got tomorrow "off" (off means constructing a 'big girl bed' for my nearly four-year-old daughter and rebuilding her toddler bed back into a cot for the little one), so I'll catch you Monday morning, no doubt totally refreshed!.

The full video of Alicia Barry's interview with Cleveland Federal Reserve president, and voting FOMC member, Loretta Mester has wound its way through the ABC's video processing systems and is now available for your viewing enjoyment.

Profits at REA Group may be down, but it says the Australian housing market is in pretty good shape.

The country's largest online real estate portal posted a 37% fall in half-year profit to $127million, blaming the decline on offshore venture Property Guru.

The company's underlying result was up 22%. Shareholders are set to receive a 16% increase in interim dividend to $0.87 a share.

But while properties are being snapped up, REA shares were offloaded today.

Investors have marked the stock down on the outlook, it was the worst performer on the top 200 list, off 4.2% to $176.43.

I spoke with Owen Wilson (not the actor) CEO of REA Group, he says listings are up, with Sydney and Melbourne leading the way, and he argues it's not forced selling driving the increase, despite the high rates environment.

"Banks are being a lot more proactive in helping consumers than they have been in the past, and I think consumers who are feeling mortgage stress are taking action before they're being forced to."

More on The Business this evening at 8:45pm AEDT on ABC News Channel, and anytime on ABC iView.

That's the question posed by Deutsche Bank's chief economist for Australia Phil O'Donaghoe.

"Inflation is slowing. But is the RBA underestimating the pace of that slowdown just as badly is it underestimated the acceleration?" he questions in a note.

"In hindsight, we now know that back in 2022, the RBA should have taken the (then) recent acceleration in inflation much more seriously. In technical terms, its forecasts should have been much more adaptive to recent hard data points.

"Fast forward to 2024, is the same lesson about to be learned again, only this time in the other direction?

"Time will tell, meaning upcoming data points are crucial. But history suggests the RBA's latest forecasts are at risk of proving too conservative.

"The RBA suggested [on Tuesday] that a 'further increase in interest rates cannot be ruled out', we would instead argue more emphatically that a May rate cut cannot be ruled out.

"Recent data could well mark a turning point. And at turning points, it pays to be nimble.

"Our baseline remains no more RBA rate hikes, and 50bps of cuts this year, beginning in Q3."

I raised some similar concerns ahead of the RBA meeting, given the confluence of weak jobs, retail, inflation and lending numbers in December.

The analyst notes have started flowing on AGL's half-year profit result and updated full-year outlook, which Barrenjoey analysts estimate beat consensus forecasts by around 10%.

No wonder than AGL shares were up 11% shortly before 2:30pm AEDT.

So where did this rise in profit come from?

It wasn't from more customers — energy customer numbers fell by 12,000 (still 3.95 million), although AGL did pick up some telecommunications customers as it expands into that area.

It also wasn't from higher energy use, quite the opposite — total electricity customer sales were down 6.6%, driven by an 8.8% drop for consumer electricity sales and a 12.3% fall for big business customers, while wholesale energy sales edged up 0.3%.

AGL said the reduction in consumer sales was both from losing customers and due to lower demand as the weather was mild and solar generation increased.

So AGL is selling less energy but making more money. How?

"Our first half result was driven by improved fleet availability and flexibility, more stable market conditions, along with the impact of higher wholesale electricity pricing from prior periods being reflected in pricing outcomes and contract positions," said the company's CEO Damien Nicks.

Consumer price increases of up to 25% for the electricity default offer set by energy regulators helped AGL from July 1.

At the same time, AGL's fossil fuel costs as a power generator plunged 28.6%, wholesale power prices also fell (which helps AGL as a retailer, but costs it as a generator).

Barrenjoey pointed out that consumer electricity gross margin of $327 million was  was up 61% on the prior corresponding period, from customers moving off low fixed rates, better solar rates (for the company) and the timing of electricity price changes.

Total wholesale gas costs were down 32.6%.

That said, other costs rose. Operating costs climbed 13.9% to $877 million, while capital expenditure climbed by $100 million to $367 million — of which $200 million was spent keeping the company's ageing coal-fired power stations running.

And RBC Capital Markets analyst Gordon Ramsay says AGL is indicating it will spend about $950 million on building new and sustaining existing assets this year.

He believes that electricity prices are likely to be flat or lower next financial year.

"AGL has stated it is too early to comment on the pricing outlook for FY25, although we think it looks weaker and would be flat at best," he noted.

"We believe that 2023/24 summer spot electricity pricing will lead to flat to slightly lower wholesale allowances for the DMO/VMO, and due to rising costs we continue to forecast FY24 as a peak earnings year."

More from Alicia Barry's exclusive interview with Cleveland Federal Reserve president and voting FOMC member Loretta Mester.

While she says that people might need to be patient to see US rate cuts, she does believe they will come this year.

"You never want to rule anything out, because the economy could evolve very differently than anticipated, but my feeling is that we are at a peak rate, and that the real decision going forward is, you know, what's the appropriate time to begin reducing the degree of restrictiveness," she told The Business.

"If the economy evolves, as I expect it to, then I'd be comfortable in feeling that it's going to be later this year, that we will be probably in a position to be able to normal start normalising the interest rate back down."

Alicia asked Dr Mester whether she still held the view that the Fed would need to cut three times this year.

"I haven't formulated my new forecast, because that'll be at the next meeting, the March meeting, but I think that's about right," she responded.

"Right now, if I had to write down a forecast, that's probably what I would write down."

So that's at least one of the dots on the Fed's famous rate outlook dot plot that we can pretty safely pencil in.

Hi Bill, there are no silly questions on the ABC markets blog — it's our job to explain these things.

The market pricing we report on are data crunched by the two financial news and data services the ABC subscribes to — Bloomberg and Refinitiv.

Both have algorithms that calculate either the probability of a particular move or the expected cash rate for a given month based on the pricing of interest rate futures on money markets.

Basically, these are traders and financial firms looking to either make bets on the future path of interest rates or to hedge their future interest rate exposures with someone willing to take on the risk for the potential profit.

By seeing what that futures pricing suggests interest rates will be, you can calculate how likely a rate cut is in the eyes of market participants — basically the big investment banks, funds and trading houses.

Of course, the 'market price' is just where buyers and sellers meet, so it's a kind of middle ground view. And, as we know from gyrations in all kinds of financial market pricing, it can move quickly as new data emerges or even just because sentiment has shifted.

To use a political analogy, the market pricing of interest rates is kind of like looking at the betting odds to determine the likely outcome of an election, while the survey of economists is more comparable to opinion polling.

I hope that is a useful explanation that makes some sense?

While central banks across most of the Western world wring their hands over whether inflation is coming down fast enough, the Middle Kingdom is mired in the opposite problem.

China's deflation got even worse last month, with the biggest consumer price falls seen since the global financial crisis.

The head of China economics at Capital Economics, Julian Evans-Pritchard, has a very comprehensive quick take on the data:

"CPI deflation deepened from -0.3% y/y in December to -0.8% last month, the sharpest price falls since the Global Financial Crisis and well below consensus expectations (the Bloomberg consensus and our forecast were -0.5%). The main driver was deepening of food price deflation, from -3.7% y/y to -5.9%. This largely reflected a higher base for comparison caused by a shift in the timing of Lunar New Year and lifting of zero-COVID. But food prices also fell last month even after accounting for seasonality.

"Core inflation fell from 0.6% y/y to just 0.4%, a 7-month low. The main driver was a sharp fall in the tourism price inflation, from 6.8% y/y to 1.8%. This component is volatile around Chinese New Year and likely to bounce back in February. But there were some signs of continued disinflation in less seasonal parts of core CPI. Transportation facility price deflation deepened from -5.4% y/y to a record low of -5.6%, as carmakers continued to cut prices to amid fierce competition for EV market share. And rental inflation, which used to make a sizeable contribution to core inflation, also eased from 0.3% y/y to 0.2%.

"Producer price deflation eased, rising from -2.7% y/y to -2.5% (Bloomberg: -2.6% and CE: -2.8%). This was partly due to a lower base for comparison. But the pace of m/m price declines also eased, from 0.3% m/m to 0.2%, supported by increases in metal prices amid the recent uptick in infrastructure spending.

"Looking forward, we expect easing food price deflation to lift consumer price inflation into positive territory in the coming months. But core inflation will probably stay low. While declines in car prices are likely to slow as the market finds a new equilibrium, close-to-zero rental inflation is here to stay given the sizeable oversupply of housing and declining population. All told, we think inflation will stay low, with CPI inflation to average only 0.5% in 2024, up from 0.2% in 2023."

This from the ABC's business editor Ian Verrender:

If you wince every time that little gadget attached to your windscreen beeps when cruising down the expressway, you can take satisfaction that it's all been for a good cause.

Transurban, the company that operates almost every toll road on the Australian east coast and a handful in the US, has just reported a fourfold lift in first half earnings to $230 million from $55 million this time last year.

The company attributed the bonanza to a happy combination of improved revenues from toll roads both here and America, and lower financing costs.

Transurban recently has been embroiled in controversy on its Sydney network after the opening of the Roselle Interchange created chaos on Sydney roads, sparking allegations, denied by the company, that its government contract discriminated against non-toll users.

It also has been mooted as a potential bidder for Melbourne's EastLink toll road despite a warning from the Australian Competition and Consumer Commission last year that Transurban's involvement would substantially lessen competition.

Unlike many businesses, Transurban has been a major beneficiary of inflation. Many of its toll road concession deals were struck during the past two decades when inflation appeared to be a distant memory, never to return.

It was able to strike deals with state governments that locked in guaranteed profits. Some concessions give the option of toll increases of at least 4 per cent each year or the rate of inflation, whichever was higher, until 2040.

Group average daily traffic lifted 2.1 per cent, according to its release to the Australian Securities Exchange, slightly below forecasts. Despite that, it still managed to lift proportional toll revenues 6.3 per cent to $1.76 billion due to all the price increases.

Investors, however, were disappointed that Transurban didn't manage to milk even more money from road users, with its share price down 0.6% to $13.24 by 1:30pm AEDT.

• ASX 200: +0.5% at 7,652 points
• Australian dollar: -0.1% to 65.24 US cents
• Nikkei: +0.8% to 36,414 points
• Hang Seng: -0.6% to 15,989 points
• Shanghai: +0.1% to 2,832 points
• S&P 500: +0.8% to 4,996 points
• Nasdaq: +1% to 15,764 points
• FTSE: -0.7% to 7,629 points
• EuroStoxx: -0.2% to 487 points
• Spot gold: +0.2% at $US2,037/ounce
• Brent crude: +1% to $US79.41/barrel
• Iron ore: Flat at $US125.00/tonne
• Bitcoin: +3.5% to $US44,526

Prices current around 12:40pm AEDT

Live updates on the major ASX indices:

The Australian share market is holding onto its early gains, up 0.3% to 7,638 points, with the utilities sector leading on AGL's better-than-expected half-year profit.

AGL was up 11.4% to $8.89 by 12:22pm AEDT, pulling utilities overall up 1.9%.

Despite a 21% fall in revenue, as both residential and large business customers cut back on their electricity use, AGL's half-year underlying profit surged 359% to $399 million from just $87 million in the same six-month period to December 31 a year earlier.

Its statutory profit flipped from a $1.075 billion loss to a $576 million profit.

It also upgraded its forecast for underlying full-year net profit from a range of $580-$780 million to a range of $680-780 million.

News Corp was another company to gain substantially on its latest profit update, rising 5.2%.

Mirvac was also up 5.1%, despite posting a $201 million statutory loss for the December 31 half-year.

Other sectors to gain strongly on the Australian market were mainly those sensitive to interest rates, such as real estate, consumer cyclicals and financials.

In an exclusive one-on-one interview with ABC TV's The Business program, voting Federal Reserve member Loretta Mester joined the chorus of central bank officials pushing back on the prospect of rate cuts over the next few months.

"I think the market got ahead of itself a little bit, you know," she told Alicia Barry, in an interview recorded this morning.

"Remember, before the [January] meeting, they were thinking that the first cut would be March, right.

"So, again, I think we've just got to wait until we get more information.

"I think we're in a very good position, that the economy is in a good position, and our monetary policy is in a good position. So that we can do that assessment."

Loretta Mester is president of the Cleveland Federal Reserve, and in 2024 holds a vote on the Federal Open Market Committee (FOMC), which sets the benchmark US interest rate.

As with her counterparts at the Fed, as well as officials from the European Central Bank and the RBA governor Michele Bullock, Dr Mester said she expects the pace of disinflation to slow down now that the worst of the COVID supply chain bottlenecks have been resolved.

"A lot of the great progress we've made on inflation has been supply side driven, which means that I don't think we should count on the same rate of progress this year as we got last year," she argued.

"I still think there'll be progress and inflation will continue to move down."

We'll have video of the full interview up on the blog later this afternoon, or you can watch it later today on ABC iView, YouTube or tune in the old school way to ABC News Channel at 8:45pm AEDT on the TV.

• ASX 200: +0.3% at 7,639 points
• Australian dollar: +0.1% to 65.23 US cents
• S&P 500: +0.8% to 4,996 points
• Nasdaq: +1% to 15,764 points
• FTSE: -0.7% to 7,629 points
• EuroStoxx: -0.2% to 487 points
• Spot gold: +0.1% at $US2,036/ounce
• Brent crude: +1.1% to $US79.43/barrel
• Iron ore: Flat at $US125.00/tonne
• Bitcoin: Flat at $US44,169

Price current around 10:30am AEDT

Live updates on the major ASX indices:

The Australian sharemarket has opened higher, tracking gains on Wall Street.

The ASX 200 were up 37 points or 0.5% to 7,652, by 10:25am AEDT, with utilities (+2.6pc) and consumer (+1.4pc) stocks leading the charge.

All sectors were in the green except for the energy sector.

AGL (+10.1pc), News Corp (+7.7pc) and Cochlear (+6pc) were the standouts after posting strong earnings.

Here are the top and bottom movers at open.

Media conglomerate News Corp beat Wall Street estimates for second-quarter revenue, driven by growth in digital subscriptions and a rebound in its book publishing unit.

News Corp, a part of media baron Rupert Murdoch's empire, saw a surge in digital subscriptions for its Dow Jones unit, which includes leading publications such as The Wall Street Journal, Barron's and Market Watch.

It benefited from bundling products as customers look for one-stop-shop products to consume market analysis and professional insights services.

After a slowdown during the COVID-19 pandemic, the media company is also seeing a rebound in its book publishing segment, comprising HarperCollins that has publishing operations in around 15 countries.

Revenue in the quarter ended December 31 rose 3% to $US2.59 billion for News Corp, compared with estimates of $US2.55 billion, according to Visible Alpha data.

Excluding items, the company earned 26 US cents per share, compared with estimates of 21 US cents.

Revenue at the Dow Jones business grew 4% to $US584 million, while that at its Digital Real Estate Services unit, which operates Realtor.com, rose 9%.

Strength in the professional information business, which rose 13%, boosted the quarter.

The company's revenue at its book publishing segment grew 4% to $US550 million.

News Corp posted about 5.6% decline in its advertising revenue in the quarter as marketers kept a tight leash on ad budgets in an uncertain economy.

Earlier on Wednesday, News Corp's peer Fox Corp reported a 20% fall in advertising revenue, while New York Times missed revenue expectations due to a slowdown in advertising sales.

AGL Energy raised the lower end of its annual profit forecast range on Thursday, betting on higher wholesale electricity pricing and improved plant availability, after it posted a fourfold jump in its half-year profit.

The upbeat results come after the power producer, which also sells retail power to one-sixth of Australians, emerged from a string of prolonged plant outages and volatile energy markets in the corresponding period a year earlier.

"We expect this positive momentum to continue into the second half of FY24 and we are on track to deliver full-year earnings in line with our FY24 guidance range," CEO Damien Nicks said in a statement.

AGL expects its underlying profit to be between $680 million and $780 million for FY24, compared with its previous range of $580 million and $780 million.

For the six months ended December 2023, its underlying net profit after tax was $399 million, compared with $87 million a year earlier. According to Jefferies, the Visible Alpha consensus estimate was $311 million.

AGL, also the country's top carbon emitter, declared an interim dividend of 26 Australian cents per share, higher than 8 AU cents declared last year.

Either global developed economy central bankers have been on the phone to each other a lot lately to coordinate a communications strategy, or they all think alike.

After the RBA's governor Michele Bullock told us earlier this week that a further rate rise "cannot be ruled out", other senior officials have pushed back on the idea of rate cuts in March or even by May.

Minneapolis Fed president Neel Kashkari — who is currently not on the Federal Open Market Committee (FOMC) that sets US interest rates, but attends its meetings — has said economic strength means the Fed can take its time before cutting interest rates.

"The labor market is staying strong, as evidenced by the really strong jobs report on Friday. That's all really good news," he told financial news network CNBC.

"And that tells me maybe monetary policy is not putting as much downward pressure on demand as we would otherwise think.

"And so, given that, I think we can take more time, get the inflation data, see it continuing hopefully to come in very attractively around our 2% target.

"It gives us more time to assess that data before we start reducing interest rates and so I think this is a good problem to have."

Kashkari is expecting about half as many rate cuts this year as financial markets have been pricing in.

"I would say two to three cuts would seem to be appropriate for me right now. But again, I don't want to prejudge things, but that's my gut based on the data we have so far."

However, bad news on the economy could change that.

"If we saw a material slowdown in the labor market, then that would say, hey, maybe we need to start cutting rates a little bit more quickly."

Over in Europe, ECB board member Isabel Schnabel was even firmer in her push back on rate cuts, saying that the majority of the effect of interest rates has already occurred, and monetary conditions seem to be easing.

"Initially, we had the quick wins of disinflation, which is the reversal of the supply-side shocks," she told the Financial Times in a one-on-one interview.

"We are observing a slowdown in the disinflationary process that is typical for the last mile. This is very closely connected to the dynamics of wages, productivity and profits. We had a sharp decline in real wages, which was followed by strong growth in nominal wages as employees are trying to catch up on their lost income.

"The services sector is affected particularly strongly because wages play a dominant role in its cost structure. At the same time, we've seen a worrying decline in productivity and there's a discussion about what is driving this."

She said higher interest rates are needed to keep demand contained so that businesses are unable to pass on all of their rising costs.

"If demand is held back by restrictive monetary policy, it will be much harder for firms to pass through higher costs to consumers. They will be forced to absorb at least part of those higher costs. This is critical, in particular during the last mile, and we are seeing some evidence that it is happening."

However, Schnabel sees that as an argument for staying the course on current interest rates until that last mile has been travelled.

"That's why recent incoming data do not allay my concerns that the last mile may be the most difficult one," she continued. We see sticky services inflation. We see a resilient labour market. At the same time we see a notable loosening of financial conditions because markets are aggressively pricing the central banks' pivot.

"Taken together, this cautions against adjusting the policy stance soon. It means we must be patient and cautious because we know also from historical experience that inflation can flare up again."

That also means rate cuts, when they start, are likely to be modest.

"Once we start to cut rates — and as I said, we're not there yet — we must proceed cautiously in small steps. We may even need to pause on the way down if inflation proves sticky and the data does not give a clear picture about how restrictive our monetary policy is."

Alicia Barry just spoke to the Cleveland Federal Reserve president Loretta Mester, who is a voting member of the FOMC, and we'll have highlights from that interview on the blog shortly.

The interview will air tonight on The Business at 8:45pm on ABC News Channel and be available on iView and YouTube (and on this blog) before then.

If you want more on the local rates outlook, I wrote this piece yesterday afternoon.

Price gouging is pushing up inflation and our laws are letting companies get away with it.

Those are the findings of a damning report by former ACCC boss Allan Fels that was commissioned by the ACTU.

If you missed last night's The Business program, you can watch this story by business reporter Emilia Terzon here.

New legislation will allow the Fair Work Commission to set minimum standards for gig economy workers who will be considered "employee-like" if they meet certain criteria.

The legislation will also introduce a pathway for casuals wanting to convert to more permanent work, a new definition of employment, protections for road transport workers and prevents employees from being disadvantaged for not answering calls or emails outside of work hours.

The Senate is expected to vote on the legislation on Thursday after the government secured the support of Senator David Pocock in return for a series of amendments.

Read more from political reporter Nicole Hegarty.