Daily Market Reports | Sep 02 2011
By Greg Peel
The Dow closed down 119 points or 1.0% while the S&P fell 1.2% to 1204 and the Nasdaq lost 1.3%.
The good news in Australia yesterday was a 0.5% jump in July retail sales when economists were expecting only 0.2%. There is certainly a suggestion retail expectations have become too gloomy, and retail sector stocks oversold, but there are a couple of points to consider. Firstly, it's the first rise after three months of falls, so sales have been rebased to a lower level. Year on year growth is a mere 1.4%, which compares to a long-run average of 3% and a noughties boom average of 6%. Secondly, these are July numbers, and August has been a shocker for consumer confidence.
Capital expenditure is one of the most important economic drivers and determinants of GDP growth, and yesterday's increase in Australian capex in the June quarter of 4.9% was a solid result. It is enough for economists to suggest the June quarter will see a rebound into growth territory for the June quarter GDP, with forecasts currently sitting just under 1.0%. Year on year capex has grown by 11.8%, which includes slippage caused by weather disruptions in the March quarter. It's no great surprise that most of the capex growth has been derived from the mining states.
Of vital importance to economic forecasting is the survey of capex intentions going forward. This number is 18.5% higher year on year. Are we in a two-speed economy? Mining capex intentions are up 45%, service sector intentions are down 2%, and manufacturing sector intentions are down 6.6%. Note that the RBA pays very close intentions to capex intentions as a guide to inflation expectations, which in turn are the most fundamental driver of monetary policy. Net capex intention growth of 18.5% does not support talk of rate cutting. Although again, August may have put a dent in the numbers.
It's still not good news for Australia's near obsolescent manufacturing sector. Yesterday it was revealed Australia's manufacturing purchasing managers' index (PMI) fell to 43.3 in August from 43.4 in July. In the past twelve months only two have shown growth (result above 50) and ten have seen contraction.
China's manufacturing PMI rose officially to 50.9 from 50.7 in July, and unofficially (HSBC) to 49.9 from 49.3. Take your pick of slight expansion or slight contraction, but either way it's an improvement from July and an indicator China's policy-inspired slowing may have bottomed, which is always good news for Australia (unless you're in manufacturing).
The eurozone's PMI fell to 49.0 from 50.4 which is the first contraction result since September 2009, while the UK PMI fell to 49.0 from 49.4 to mark a 26-month low. Austerity measures are clearly having an impact. The good news, however, was that the US number fell to 50.6 from 50.9. It's good news because all and sundry were braced for contraction (number below 50).
So what does Wall Street do on good news? It buys of course. On the release early in the session the Dow shot up 100 points in a blink.
However if it shot up in a blink it means there wasn't any real buying, just sellers backing off. The sellers decided 100 points was enough, and then proceeded to sell the Dow down 200 points gradually to the close. Why sell? Because the better the economic news the less likelihood of QE3. A number like 50.6 implies barely visible growth in manufacturing and that sector is a major employer. A “good” result would either have to have been a big jump in the PMI to show an increasing rate of growth, or a fall into contraction which means Fed to the rescue. This result was limbo-land, hence bad.
There is also an assumption Wall Street sold down because no one wants to take a position ahead of tonight's jobs report, and tonight is also a Friday before a long weekend in the US so a lot of Wall Street takes off early. But if good is bad and bad is good then selling must been expectations of good and…I give up. Goldman Sachs last night cut its August jobs forecast to a mere 25,000 additions, which is a far cry from the 200,000 considered necessary to lower the unemployment rate.
We went through all this last year with QE2. Ongoing weak US data meant Wall Street started rallying from September, because QE2 had been flagged as an option by Bernanke at Jackson Hole in August. The Fed did not actually announce QE2 until November, but by then the rally was well underway. This time the expectation is for an announcement at the two-day meeting in September (20-21) so until then, Wall Street will probably be hoping for more weak data.
Generally weak global manufacturing PMIs had base metals on the retreat in London last night, with falls of 1-2%. Oil prices have stalled at current levels nevertheless, with a new tropical storm – this one in the Gulf – preventing any great drop at present. Brent and West Texas were little changed at US$114.29 and US$88.77/bbl respectively.
The US dollar index rose 0.6% to 74.55, supposedly reflecting a better PMI in the US than in Europe, while the ten-year bond yield fell 9bps to 2.14% as if someone expects a big buyer to come in soon. The Aussie was individually boosted by yesterday's economic data and is up 0.3% to US$1.0730.
The SPI Overnight fell 49 points or 1.1%. Seems a bit harsh.
So it's US jobs tonight, and who knows which way Wall Street will jump on whatever the result may be? Then it's the Labor Day long weekend so no Wall Street on Monday night.
Markets have also been awaiting a speech from President Obama outlining new, post budget cut policies, which to date had been set for “after Labor Day”. First choice was Wednesday night, until the Republicans complained that they were having a presidential candidate debate that night (I worship God more than you do. No I worship God more than your do. I believe Hurricane Irene was God's revenge on the government. Well I believe Obama is the spawn of Satan…). The new choice is Thursday night, but the president has had to promise he will wrap before the Green Bay Packers kick off in the NFL season opener. God bless America.
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