Citi's contrarian call on coal (and six other moves)

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 - 3,577 (-0.34%)
• NASDAQ - 10,786 (-0.05%)
• CBOE VIX - 33.68
• USD INDEX - 113.28
• US 10YR - 3.9%
• FTSE 100 - 6,826 (-0.86%)
• STOXX 600 - 385.88 (-0.54%)
• UK 10YR - 4.472%
• GOLD - US$1674/oz
• WTI CRUDE - US$87.05/bbl
• DALIAN IRON ORE - US$96.97/T

US CPI PREVIEW

With US inflation out tonight for the month of September, here are some hot takes from the leading economists for what to expect this evening at 11:30pm AEDT:

ANZ: "We expect US core CPI to rise by 0.5% MoM in September, while lower energy prices should result in headline inflation increasing by 0.3%. Elevated rent and robust wage growth are expected to keep services inflation uncomfortably high."

ING: "We look for a 0.4% MoM increase in prices, which would nudge the annual rate of core inflation up to 6.5% from 6.3%. This unfavourable shift is primarily due to housing costs and recreation prices and should cement expectations for a fourth consecutive 75 bps interest rate increase from the Federal Reserve on 2 November."

Deutsche Bank: "It seems inevitable that a notable miss on core on either side could bring about big moves in trading over the coming weeks so stand by."

Citi: "We expect a continuation of the trend of still solid monthly increases. Risks are tilted slightly to the downside though due to a softening in goods prices generally over the coming months."

Westpac: "Markets are almost fully priced for the Fed to raise its funds rate by a further 75bp in November, to 3.75-4.0%. But pricing could change in either direction if US September CPI surprises."

THE CHART

Speaking of US inflation, this is the story of the hour. Headline inflation has been coming down steadily over the last few months (though pictures of soaring petrol prices in California isn't doing many favours). But what isn't coming down is core inflation - headline minus oil prices and food inputs. Both goods and services prices are flat but stubbornly flat, as shown in this chart by TD Securities. 

This will be key to watch for tonight's number.

STOCKS TO WATCH

As we alluded to yesterday, mining quarterlies are around the corner and yesterday, we shared with you some of Goldman Sachs' moves. Today, we're sharing Citi's moves - and there are even more of them than the ones we had on yesterday's list. All of them (if I'm being honest) would be great headline ideas. But we couldn't go past this top-line view.

On a 12-month view to Q4 CY22, Citi looks for iron ore, aluminium and manganese to be up 13-22%. We expect a pull-back from today’s very high lithium prices, with a further correction in coal, nickel and oil.

So with all this in mind, you shouldn't be surprised what the top downgrade is of this bunch - Whitehaven Coal (ASX: WHC) slashed to a blaring sell. Here's the thesis:

Whitehaven is now trading above fair value. We see a risk that coal prices stay higher for longer, but at current share price levels the risk/reward equation is skewed against investors in our view.

We also alluded to Deterra (ASX: DRR) and South32 (ASX: S32) in yesterday's report. Goldmans went one upgrade and one downgrade. But Citi's gone two for two, arguing recent share price declines are good enough reason to buy these stocks again. Alumina (ASX: AWC) is in the same boat - its 34% share price decline over the last six months + a strong balance sheet makes it a buy.

The only other downgrade in this group is actually quite interesting. Nickel is, by these projections, going to perform better than brent crude and lithium, but it's Nickel Industries (ASX: NIC) that cops the downgrade. While the valuation looks good over the next 6-12 months, it could also be range-bound for a while. It's now a neutral (high-risk). 

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