The Monday Report

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By Greg Peel

As far as US jobs reports go, it was an absolute shocker.

Wall Street had ridden on a wave of hope and enthusiasm last week, aided by strong manufacturing, housing and sales data and momentum first sparked by the Greek resolution and signs of a rapid recovery in Japan. The excitement culminated on Thursday night when the ADP private sector jobs report showed an addition of 157k new jobs when only 70k were expected. Suddenly it appeared as if the so-called “soft patch” was over and that any talk of a double-dip was misguided.

So excited had Wall Street become that economists scrambled to revise their non-farm payroll estimates up, from consensus of 80k to 125k, with outliers much higher still. With the June quarter earnings season set to kick off tonight, there was an air of positive anticipation.

One assumes that the first people to see the actual June jobs result hit the screen must have thought they were misreading, or that someone had left out a zero. But no, only 18k jobs were added in June. To rub salt into the wound, the May figure – which at an initial announcement of 54k was disappointing enough at the time – was revised down to only 25k. From February to April America added an average 215k jobs. By March the unemployment rate had fallen to 8.8%. But in the last two months, an average of only 22k jobs have been added. And the unemployment rate is back at 9.2%.

I suggested on Friday that Wall Street had a habit of setting itself up for disappointment through overly ambitious jobs forecasts. But this one really takes the cake. The ADP figure has long been criticised as an inaccurate indicator of the official number, but then as to who's right and who's wrong is up for debate. Either way, one minute Wall Street was talking a new bull market and next they were resurrecting QE3.

The US bond market told the tale – the benchmark ten-year yield fell a solid 13 points to 3.01%. Gold chimed in by adding US$11.60 to US$1544.30/oz. Yet the stock market was strangely resilient. Having fallen 150 points by 11am, the Dow spent the rest of the session grafting back to be down only 62 points or 0.5%. The S&P was a bit worse off, ending with a 0.7% fall to 1343.

Wall Street remains confident that June quarter earnings will be strong enough to steer attention away from jobs. Blind faith? We will soon know.

Remarkably, the US dollar index finished up 0.3% on the day to 75.12. But the dollar did weaken against all currencies bar the euro, which had its own problems. Ructions between the Italian prime minister and his finance minister have become public, with disagreement over austerity measures overshadowed by accusations of corruption levelled against the finance minister. European markets were spooked, given the finance minister is held in high regard as a steady hand in the time of crisis while Berlusconi is, well, Berlusconi.

Commodity prices, which had posted a strong session on Thursday night, spun on their heels in the wake of the US jobs report. Aluminium and zinc fell 2% and led all metals lower. West Texas crude fell US$2.10 to US$96.57/bbl to wipe out most of Thursday's gain. Offering more bad news to the global economy was Brent crude, which having risen US$5 on Thursday fell only US39c on Friday to US$118.20/bbl.

It's a simple reality. While abundant Canadian oil flows south to Oklahoma and threatens to overfill Cushing storage tanks, North Sea oil resources are on the wane. This is not new news, but it comes at a time when Brent has assumed the mantle of the global “oil price”. The Brent-WTI spread is now back out to US$22 but little can be done to release land-locked West Texas crude onto the market. Exportable Louisiana Light is trading closer to the Brent price. Until vast sums are spent and significant time is taken to build a pipeline from Oklahoma to the coast, the only winners are midwest US refiners who are buying crude at West Texas prices and selling gasoline at Brent prices.

The Aussie fell only 0.2% on Friday to US$1.0760 but the SPI Overnight fell 40 points or 0.9%.

All eyes now turn to Alcoa's (Dow) result tonight. Then we wait for JP Morgan Chase (Dow) and Google on Thursday followed by Citigroup on Friday.

In the meantime, Beijing has pulled a swifty. Just when it seemed Chinese officials were getting the hang of providing release schedules and sticking to them, the GDP report and monthly “data dump” slated for Friday has been brought forward and severed. China's June quarter GDP result will be released on Wednesday, apparently, along with industrial production and retail sales. Having hiked interest rates last week, Beijing obviously decided it couldn't sit on its inflation data any longer.

It was announced on Saturday that China's CPI had risen to 6.4% in June, up from 5.5% in May. While this seems ominous, it was not unexpected. Food prices were up 14.4% in June year-on-year, or 0.9% month-on-month, driven by an 11.4% rise in staple pork. Pork prices are expected to ease in the second half and the CPI rate is thus expected to ease. Beijing had already raised its interest rate, for the third time this year, last week.

The Australian government outlined its carbon tax proposal on Sunday. I'm sure plenty will be written on that topic and stock analysts will soon begin to provide their more definitive impact reports.

Aside from US earnings results, this week brings the US trade balance on Tuesday and the Treasury budget on Wednesday. Wednesday also sees the release of the minutes of the last Fed policy meeting and Chairman Bernanke is independently due to make a speech. What will he have to say about US unemployment?

Things then heat up on Thursday with retail sales, business inventories and the PPI, with Friday bringing the CPI, industrial production, the Empire State manufacturing index and the fortnightly consumer sentiment measure.

From Tuesday through Thursday, the Treasury will auction US$66bn of three and ten-year notes and thirty-year bonds. These auctions take on a particular significance as they are the first to be held post the expiry of QE2. The Fed doesn't participate in auctions, preferring to buy bonds on the open market, but suffice to say the elephant has left the room.

Credit growth, or lack thereof, is in focus for Australia this week. Today sees home loans and investment lending and tomorrow brings net lending finance. NAB will also release its monthly business confidence survey on Tuesday and Westpac follows on Wednesday with its consumer confidence report.

That's it for Aussie data but this week also sees the beginning of the resource sector June quarter production report season. At stake will be the speed with which the miners have managed to recover production lost from the wild weather in the March quarter. Coal & Allied ((CNA)), ERA ((ERA)) and Iluka ((ILU)) report on Wednesday, OZ Minerals ((OZL)) and Rio Tinto ((RIO)) follow on Thursday, and Friday sees Fortescue Metals ((FMG)).

Across the rest of the globe attention will also turn to UK and eurozone industrial production and trade balance data due out this week, as well as to the Bank of Japan's policy statement on Tuesday.

Rudi will be appearing on Sky Business at 12pm on Thursday.

Thursday will also see the launch of a new FNArena  broadcast initiative in association with Boardroom Radio. Stay tuned.

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

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