The Overnight Report: Mixed Signals

This story features NEWS CORPORATION, and other companies. For more info SHARE ANALYSIS: NWS

By Greg Peel

The Dow closed up 44 points or 0.4% while the S&P gained 0.6% to 1127 and the Nasdaq added 0.9%.

On Tuesday night we saw weak readings in the US for factory orders and pending home sales and a set of income and spending data which pointed clearly to deflation, or at least lack of inflation. Procter & Gamble warned the American consumer was hiding.

US data over the past couple of months have been consistently weak while European data have been surprising to the upside. This has affected a drop in the US dollar as the euro has rebounded, albeit the lack of interest rate differential between the US and Japan nowadays has also affected a long, slow decline in carry trades into the US. The dollar has fallen 10% against the yen.

Despite the clearly weaker US economy, the stock market has been optimistic, preferring to focus on solid earnings results and to ignore weak revenue growth. Tuesday night saw only about a 40 point drop in the Dow.

Well last night everything went back the other way.

Clearly unemployment is at the forefront of economic data concerns, and the official non-farm payrolls number will be released on Friday. Last night the independent ADP private sector jobs figures were released to provide a precursor. Economists had expected the report to show jobs growth of 23,000, but the number came out at 42,000.

Next came the services sector PMI. Against the tide of recent data flow, the services sector index rose from 53.8 in June to 54.3 in July. Suddenly we have two lonely pieces of good news.

It all must be put into context of course. The ADP number was heartening, but the running average of 37,000 jobs being added per month does not beat population growth requirements. As for the services PMI, the interesting point is that it is the manufacturing PMI which gets all the attention, despite the fact manufacturing represents only 20% of US output in the twenty-first century while services – everything from finance to IT to hairdressing – represents 80%. You'd think, therefore, that the services PMI would be the biggie. But the truth is manufacturing is a lot more labour intensive, which brings us back to jobs.

The other contrasting bit of news last night was the earnings report from online discount travel service Priceline.com (no relation to Australian pharmacies). Proctor & Gamble told us the consumer was dead on Tuesday, but so stunning was Priceline's “beat” that its shares were up 22%.

Incidentally, News Corp ((NWS)) reported a Street-beating result after the bell but saw little reaction in share price.

Turning to Europe, the eurozone also released its services PMI last night and it also showed an increase. But it was not as solid as economists expected so the euro went into retreat.

So last night was unusual in the current context in that the US dollar index rose, up 0.4% to 80.94, as both the euro and yen fell. “Strong” US data was the impetus.

Beyond that, everything else was upside down. The Aussie has gained 0.4 of a cent in 24 hours despite the stronger greenback, to US$0.9168. We can thank Australia's extraordinary June balance of trade result. Gold rose US$10.00 to US$1195.60/oz.

The likelihood of gold posting a big seasonal pullback is now rapidly diminishing. The main focus is on what the Fed is expected to announce at its next meeting, which has already been dubbed “QE-lite” even before any announcement. Wall Street is convinced the Fed will stop allowing its balance sheet to reduce to a more normal size by allowing assets to mature, but rather it will roll over or recommence purchases of mortgage securities, at the very least. This means turning the printing press back on.

And while speculation still abounds as to whether the Obama Administration might extend the Bush tax cuts, or reintroduce tax credits for homebuyers in the face of a weakening housing market, last night at least one small measure was announced. The government is providing US$600m in housing assistance to those states with the highest levels of unemployment. It's perhaps a first sign the government is also willing to return to fiscal stimulus.

Gold has also been given a boost this week from out of left field. Beijing has announced it will begin to free up the gold market in China. Previously gold buying was restricted to the central bank (not counting the jewellery trade) but the government will now ease restrictions to allow banks to import and export gold and trade on the Shanghai Gold Exchange.

By September, jewellery makers will begin to buy gold stock ahead of the Asian gift-giving seasons. The question is as to whether they're prepared to risk paying US$1200/oz and hope middle class China (and India) will be buyers at that implicit price, although economic growth numbers in both countries suggest there's a pretty good chance.

The speculators were piling back into base metals again in London last night, sending metals to new multi-month highs on the back of the “strong” US data. Everything was up 1.0-1.5%.

Oil was nevertheless flat (down US8c to US$82.47/bbl), held back by the weekly inventory data chocolate wheel.

And a stronger US dollar usually means stronger US bond prices, but the opposite was true and the ten-year yield rose 4 bips to 2.95%.

The SPI Overnight gained 28 points or 0.6%.

The rally last night means the S&P 500 is more or less sitting right on its 100-day moving average, so we are at another critical point. Tonight in the US sees the major chain stores release their monthly sales data which will draw the focus squarely back on the consumer ahead of Friday's jobs number, as will earnings results from Dow components Kraft and Walt Disney.

ResMed ((RMD)) will report in the US tonight, the News Corp ((NWS)) result is out, and today in Australia sees results from Rio Tinto ((RIO)) and Tabcorp ((TAH)).

[Note: All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.]

Click to view our Glossary of Financial Terms