The Monday Report

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

By Greg Peel

As CNBC's Ron Ensana put it on Friday evening, the US September jobs report had “nothing for everyone”.

Net job losses amounted to 95,000 which was much worse than economists' 20,000 or less loss expectation. However the numbers in the public sector continue to be distorted by ongoing census worker lay-offs, and the private sector did actually add 64,000 positions.

The expectation here was for 86,000, so again there was some disappointment, albeit any positive number has to be somewhat encouraging under the circumstances. The unemployment rate remained at 9.6% instead of the 9.7% expected, but then that figure depends on how many disillusioned job seekers throw in the towel.

So the conclusion is: good news and good news – good news that the private sector is at least hiring, and good news that the net number was so bad QE2 must now be a lay-down misere. That's clearly the way Wall Street saw it, because the market stumbled only slightly on the release before racing up to conquer Dow 11,000 by the close. The Dow closed up 57 points or 0.5% to 11,006, while the S&P added 0.6% to 1165.

Adding to the positive bent was a far more tangible impetus, being the Street-beating Alcoa result released after the bell on Thursday. Alcoa shares jumped 6% in Friday's trade, waving the flag for what Wall Street hopes will be a solid third quarter earnings season.

More QE2 fuel might perhaps have resulted in another rally in Treasury bonds, but the benchmark ten-year only lost one more basis point in yield to 2.38%. That rubber band is well stretched with QE2 anticipation already. Similarly, the US dollar index may have been expected to slip further than 0.2% to 77.27, but the weekend's meetings of the IMF, World Bank, and G7 and G20 finance ministers kept currency traders somewhat at bay. Although such meetings rarely produce anything significant, the current Currency War heightened the possibility of some sort of (unlikely) truce.

The Aussie also only ticked up 0.3 of a cent to U$0.9858 but commodity markets were far more candid in their QE2 expectations. Gold jumped US$11.40 to US$1347.00/oz, silver added another 3% to conquer US$23/oz, and oil added US99c to US$82.66/bbl.

Base metals flew in London, with nickel and zinc up 2%, copper and lead up 3%, and aluminium and tin up 4%.

The SPI Overnight rose 22 points or 0.5%.

And indeed a truce proved unattainable amongst the IMF policy committee members over the weekend, with the only result being acknowledgment that “frictions” existed and that the issue should be kept under watch. Stirring stuff for an annual meeting. 

The finger was firmly pointed at China and its undervalued currency, which is preventing the economies of, for example, the US and UK achieving any meaningful recovery and forcing both central banks to consider QE2. China now holds a US$2.45 trillion foreign surplus which is 30% of the total global surplus. The prospect of QE2 from the Fed is forcing Japan to try and cap its currency, with commodity countries such as Brazil bemoaning that the resultant rise in commodity currencies is undermining otherwise legitimate export receipts. Australia is in the same boat.

The US knows it can only cajole Beijing and no more given China is America's biggest creditor. There can be protectionist rantings from redneck Congressmen but strict legislation is not an option. Nor can Beijing afford to revalue its currency too quickly and risk a hard landing, and so its policy of glacial revaluation continues. In the meantime, Beijing is ever so quietly trying to diversify the investment of its foreign reserves, but then shifting out of dollars and into yen, as one strategy, is only exacerbating Tokyo's currency dilemma.

So basically the world will just bungle along, playing push-me-pull-you with currency manipulation, with little stopping gold from pushing ever higher in price bar a blow-off correction in an underlying upward trend.

While the US jobs report might have further fuelled the fires of Fed QE2 expectation, the FOMC does not meet again until November 3. The week before, the first estimate of US third quarter GDP will be in, and clearly there will be a wealth of data releases in the interim. Not the least important will be this week's monthly reading on the producer and consumer price indices and in particular the core CPI which is the Fed's barometer of inflation. Anything below 1.5% annualised may well seal the deal.

It's Columbus Day tonight in the US but stock and futures markets will be open. Banks and the bond market are closed so it may yet be quiet. The minutes of the last Fed meeting are released on Tuesday but are possibly now redundant, while Wednesday's Treasury budget and Thursday's trade balance will provide the Fed with more food for thought. The PPI's out on Thursday and the CPI on Friday, along with retail sales, the Empire State manufacturing index and the first October read on Michigan Uni consumer sentiment.

The US Treasury will issue US$66bn of three and ten-year notes and thirty-year bonds, the settlements for which will be interesting post the jobs report. The third quarter reporting season also begins in earnest next week, with highlights including Intel on Tuesday, JP Morgan on Wednesday, Google on Thursday and General Electric on Friday.

August housing finance data are released in Australia on Monday, followed by the NAB monthly business survey on Tuesday and Westpac consumer confidence survey on Wednesday. On the local stock front, the AGM timetable continues to fill while September quarter production reports from the resource sector kick off. Energy Resources of Australia ((ERA)) will report on Wednesday and Rio Tinto ((RIO)) on Thursday.

China returned from holidays on Friday and is now back in business, with its September trade balance to be released on Wednesday. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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