The Monday Report

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By Greg Peel

In March the US unemployment rate had fallen to 8.9% on its downward trajectory but in April it ticked back up to 9.0%. Early last week economists had been expecting 195,000 jobs to be added in May and a fall in the rate to 8.9% again, but after a very weak ADP private sector report on Wednesday, that forecast was pulled back to 125,000.

When the result came out before the opening bell on Friday night at just 54,000 jobs added and an unemployment rate of 9.1% the Dow plunged 144 points. The US economic recovery, it would seem, has come to a screaming halt.

Wall Street was nevertheless primed for a low number, and was also heartened by the May services PMI which came in at 54.6, up from 52.8 and ahead of expectations of 53.8. It was a much better result than the very big drop in the manufacturing PMI announced earlier in the week, and services represent 80% of US output.

There was also good news from across the pond. The “troika”, as it is now known, of the European Commission, European Central Bank and International Monetary Fund concluded their review of the Greek budget and suggested a positive outcome. More needed to be done to reduce the deficit, the troika suggested, but Greece's accelerated privatisation program should help to ensure the economy can stabilise by the new year. In the meantime, additional bail-out funds may be made available as early as July.

The news went a long way to appeasing a market made even more nervous by Moody's last week when the ratings agency suggested Greece had a 50/50 chance of default. The euro jumped 1.0% in Friday's session to be over US$1.46, and Wall Street followed. By lunch time the Dow was only around 30 points lower but the afternoon saw the indices slip away once more. By the closing bell the Dow was down 97 points or 0.8% and the S&P lost 1.0% to 1300.

The US dollar index fell 0.8% to 73.73, pushing the Aussie up 0.5% to US$1.0723.

Gold's not sure which way to jump at the moment, so rather than focusing on the easing of nerves over Greece on Friday it focused on the lower greenback, resulting in a US$9.00 gain to US$1542.80/oz. Silver was little changed but base metals managed to post mostly small gains after bargain hunters entered the market after the US jobs news.

It was also an uncertain call for oil – weak US dollar versus weak US economy – so Brent closed up US30c to US$115.84/bbl and West Texas added US17c to US$100.57/bbl.

The SPI Overnight fell 33 points or 0.7%.

Wall Street will probably be relieved that this week is a quieter one on the US economic front. The week begins tomorrow with consumer credit, followed by the trade balance and wholesale trade data on Thursday and the Treasury budget on Friday. The Fed will also release its monthly Beige Book survey on Wednesday. On Tuesday Fed chairman Ben Bernanke is due to make a speech.

Will it bring news of QE3? In the minutes of the last meeting the FOMC spent much time discussing the QE2 exit strategy and the timing of the first rate rise, but it also suggested that were the economy to stumble, the Fed stood ready to act once more. This week is expected to bring some resolution on the debt ceiling impasse in Congress with the announcement of some substantial budget cutbacks, not dissimilar to the austerity measures being currently implemented in the UK and all over Europe. While this might be welcome news on the long-term debt front in the US, it will not be good news for an economy struggling in the short term. The Fed may be forced to play counterbalance, and that means more monetary stimulus to offset diminished fiscal stimulus.

Amidst all of this, the US Treasury will this week auction US$62bn of three and ten-year notes and thirty-year bonds.

The RBA also has a tough decision to make on Tuesday. Last week's Australian GDP report was weak but only on a weather-related basis, while other indicators suggested inflationary pressures are creeping in. If the board believes the June quarter will see an export bounce to cancel out the March quarter, it might just raise the cash rate. If the board feels exports were hit pretty hard and might take a little longer to recover, then it's either July, or August after the June GDP is in.

Today in the local market we see the ANZ job ads series, the TD Securities monthly inflation gauge and the construction sector PMI. On Tuesday its the rate decision along with the monthly NAB business survey, and Wednesday brings the Westpac consumer confidence survey as well as housing finance and investment lending. On Thursday it's our turn for a jobs number.

And the RBA is not the only central bank agonising over rate decisions this week, with the RBNZ, ECB and Bank of England all holding meetings. No movement is expected nevertheless.

Oil markets will be on edge this week as OPEC members meet in Vienna on Wednesday for one of their regular production quota meetings. An awful lot has been going on in the oil space of late, with prices soaring and then falling hard, the battle still raging in Libya, and general unrest in the rest of MENA building further in pressure. At this stage however, no change to quotas is expected.

Chinese markets are closed today but on Friday the May trade balance is released.

On the local stock front, Tabcorp ((TAH)) spin-off Echo Entertainment ((EGP)) will list today and Metcash ((MTS)) will release its full year result tomorrow. 

Rudi will be appearing on Lunch Money on the Sky Business channel at 12pm on Thursday.

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

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