Daily Market Reports | Sep 30 2009
By Greg Peel
The Dow fell 47 points or 0.5% while the S&P fell a mere 0.2% to 1061 and the Nasdaq was down 0.3%.
While volume picked up from Monday’s light Jewish holiday levels, it was nothing to write home about. The Dow opened higher but quickly plunged on the release of the latest consumer confidence data before attempting to recover somewhat and finally failing on the death. Tonight in the US is the last day of the quarter, and one wonders whether the window dressers will overcome those happy to lock in profits and close the books after solid gains. Last night saw a return to the lack of buying enthusiasm which featured last week, and was punctuated only by the M&A led surge of Monday. One feels a few mannequins might have been fully clothed at that point.
Wall Street’s 10am plunge, from 45 Dow points up to 25 down in a blink, was the result of the release of the Conference Board consumer confidence survey for September. Mind you, if you think that seems volatile, cast your mind back to this day one year ago when the Dow closed down 778 points in the session. I don’t think anyone spotted the Four Horsemen of the Apocalypse last night.
Economists were expecting the net confidence measure to reach 57 after reading 54.5 in August, so a result of 53.1 was disappointing. There are two salient points to note here. Firstly, consumer confidence measures provide a clue to the consumer’s willingness to spend, and as is often noted the US consumer represents 70% of the US economy (quite the opposite in Australia, where raw material exports are the major factor). Secondly, this is not a 50-neutral index like many other economic indices, implying numbers above 50 indication expansion in confidence and below 50, contraction. It is simply an absolute measure, and economists consider the index has to reach 90 before you can say that confidence is truly healthy.
Breaking down the survey results provide a clear indication of why Americans currently lack confidence – they fear losing their job in a climate of rising unemployment. Confidence measures are a leading indicator while unemployment is a lagging indicator, which suggests a vicious cycle. For unemployment to fall, the US economy needs consumers to spend, but consumers won’t spend until unemployment falls.
And this brings into focus the hot topic of debate around the globe at present, and particularly in Australia. Government-funded fiscal stimulus is intended as the tool to break the vicious cycle. Give people money and tell them to spend for Queen and country, or in America’s case, flag and country, and hopefully rising unemployment can be scuppered and confidence can return, allowing the economy to once again function on its own.
It is a delicate operation, with excessive public debt the side effect, but it highlights the point Glenn Stevens has made this week that removing fiscal stimulus too early is dangerous, and that fiscal stimulus can live together with monetary restraint (higher interest rate) while the latter is keeping control of asset price inflation, such as runaway house prices.
China’s biggest challenge of late has been to control the flow of its massive stimulus, such that money is put towards construction and job creation and not towards gambling on property and the stock market.
The other important data release in the US last night was that of the Case-Shiller 20-city house price index for July. The index rose for the third month in a row, by 1.6% over June, with 18 of the 20 major cities marking increases.
The three month rally reinforces the belief that the US housing market is, at the very least, stabilising. Year-on-year prices remain down 13.3%, with every city weaker, and the index is 32.6% below its 2006 high. So as with consumer confidence, there’s still a long way to go before one could call the housing market healthy. What economists also fear is the seasonal effect. In every city in the world, GFC or not, demand for houses is always higher in the spring and summer and lower in autumn and winter. In the northern hemisphere case, the three rising months of May-July represent the peak buying season. How will the numbers fare from September and beyond?
In Australia of course, it’s opposite. But the first month of spring also brings the end of the government’s homeowner grants (in full – they now reduce) which is why last weekend was considered the last hurrah for estate agents and clearance rates reached a healthy 72% across the country. Again, we return to the question of how the economy will fair once fiscal stimulus is removed. Equivalent US grants (tax breaks) expire in December.
I noted last night that the US dollar had broken with its recent pattern and risen along with the stock market. There is currently a lot of focus on the yen, with Japanese government officials trying hard not to make currency policy statements that can be taken out of context. However, last night the Japanese finance minister broke ranks and suggested the recent yen strength (US dollar weakness) was “a little too sharp” and that steps would be taken if the currency reached “abnormal levels”.
Japan’s problem is an economy extremely reliant on the export of manufactured goods, such as Toyotas, which become expensive on a stronger yen. It’s one reason Japan is caught between a rock and a hard place with regard to buying US Treasury debt. Japan would like to quietly diversify away from the heavily indebted US dollar, but to do so risks a dollar collapse and subsequent yen spike. China is in a similar boat.
And as we sit cheering on the Little Aussie Battler, bear in mind that profits repatriated from US dollar-denominated sales of commodities diminish with every cent the Aussie ticks up.
The US dollar index ticked up slightly last night to 77.12, supported by yen selling. The Aussie was all but flat at US$0.8708. Gold slipped US$1.50 to US$991.70/oz, oil slipped US13c to US$66.71/bbl, and copper went nowhere, still stuck just under the US$6000/t mark.
Other base metals were slightly higher, with aluminium up 1%, nickel 1.5% and lead 2.5%. Commodity funds have mannequins to outfit as well.
The SPI Overnight was down 12 points, or 0.25%.
Today in Australia is the end of the quarter, but notably it’s also a big day for economic data releases. As the battle to push the market one way or another ensues, traders will also have to contend with results on retail sales, building approvals, private sector credit and the index of leading economic indicators.
