The Monday Report (on Tuesday)

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By Greg Peel

It was a quiet session on Wall Street on Thursday night ahead of the three-day weekend. With traders now in profit-taking mode after a week which saw expectations for QE3 diminish and nervousness grow over signs of a slowing China and trouble in Spain, the Dow opened down 62 points. But encouraging US jobs and retail sales numbers brought in the buyers to recover the losses, and on light volume Wall Street limped indifferently to the closing bell.

The Dow closed down 14 points or 0.1% after bouncing off 13,012. These runs at the 13k support level are getting closer each time but so far the buyers remain stoic. The S&P was flat at 1398 balancing out a 0.4% gain in the Nasdaq. Not only did Apple hit another new record high on Thursday, Facebook announced it had chosen to list on the electronic exchange instead of the supposedly more prestigious NYSE.

The weekly new jobless claims data showed another fall last week, with the monthly running average falling to 357,000 which is its lowest level since April 2008. Wednesday night's ADP private sector jobs number had shown 209,000 new jobs created in March, largely consistent with consensus expectations of 206,000. 

With spring rapidly becoming an early summer in the US following a very mild winter, the large chain stores are enjoying a sunny burst of business. The relatively early Easter helped, and two thirds of the retailers in the March chain store sales measure beat expectations.

Rising bond yields have meant the eurozone's fourth biggest economy has become a source of concern, prompting typical talk of “Is Spain the next Greece?”. The suggestion from wiser heads is that Spain will at worst need an injection of EU funds into its banking system rather than a full-scale troika bail-out, and let's not forget that many economists expect the smaller Portuguese economy is likely the next likely to need a bail-out. Let's also not forget that the EU ministers agreed last week to increase the European “firewall” to E700bn for exactly this sort of purpose.

Spanish concerns have nevertheless prompted weakness in the euro, pushing the US dollar index higher over the week. A combination of a strong greenback, weaker Chinese data and an anticipated RBA rate cut in May has seen the Aussie post quite a pullback over the past month. On Thursday night the dollar index rose 0.4% to 80.05, the Aussie was a little higher at US$1.0299, and gold recovered US$10.20 to US$1630.70/oz after a couple of sessions of solid falls. The biggest move was in US bonds, with the ten-year yield falling 7bps to 2.17% as a safe haven against euro-fear is once again sought.

Base metals were a little firmer in London on Thursday and Brent oil recovered US$1.09 to US$123.43/bbl, while West Texas added US$1.62 to US$103.09/bbl.

The SPI Overnight fell a soggy 20 points or 0.5%.

On Good Friday the US markets were closed but this did not prevent the release of the March non-farm payroll numbers. And they were a reality check, with only 120,000 new jobs added compared to expectations of over 200,000. It is not unusual for jobs figures to fluctuate, and nor is it unusual for results to be very different to economist expectations, but with Wall Street flirting with correction mode, this result was never going to be well received.

The supposed silver lining was a fall in the unemployment rate to 8.2% from 8.3% but this number is misleading given it measures only those registered for unemployment benefits. The rate fell because of a fall in the participation rate, meaning an increase in those abandoning their search for a job.

Europe and the UK were closed for Easter Monday when Wall Street opened on Friday with a 157 point drop in the Dow. It spent the session recovering somewhat from that level before a typical late sell-off. The Dow closed down 130 points or 1.0% at 12,929 – the first breach of the psychological 13k level in this recent down-move. The S&P fell 1.1% to 1382 and the Nasdaq fell 1.1% to 3047, with Apple yet again closing higher on the day.

The breach of 13k could well provide for some acceleration in the correction but talk on the floor is fairly circumspect. Wall Street has corrected about 4% so far but this is after a 28% rally from last year's lows. In other words: big deal. Since the stock market began to rally out of its GFC depths in 2009 its progress has been often punctuated by corrections of 7-10%.

The other important element of last night's trade was the lack of volume. A lot of regular overseas players were off enjoying a more extended Easter, but still the volume on the exchanges was noticeably light. This tends to suggest little conviction from sellers and more a lack of buyers.

London was closed, so there was no base metal trade night. The US dollar index fell 0.3% on the night to 79.78 in response to the jobs report. Gold added another US$9.70 to US$1640.40/oz and the Aussie is little changed at US$1.0313.

Oil markets were open, so Brent lost US76c to US$122.67/bbl and West Texas dropped US$1.00 to US$102.31/bbl.

If Wall Street is now nervous, it may be apparent in a 12% rise in the VIX last night, but that still only gets us to 18. The more obvious move was in the US ten-year bond yield which plunged 14 points to 2.04%. It's funny how everyone was despairing the Fed's omission of QE3 talk last week and with one soggy jobs number the assumption is QE3 will always be there if needed.

The SPI Overnight was closed, so the net fall over the weekend remains at 20 points until the futures open again half an hour before the physical market.

Outside of fresh wobbles in Europe, Wall Street's next potential direction driver will be the March quarter corporate earnings season which kicks of tonight with the Alcoa report. As I have noted several times recently, the March quarter is expected to represent the first easing off of US earnings growth since the rebound out of the recession in 2009. Over the period, US companies have cut costs, reduced inventories, sold assets, and undergone substantial deleveraging, all of which has gone some way to distorting earnings per share numbers.

Wall Street is thus already braced for more subdued numbers this season compared to many record results in the quarters prior. Yet there has still been a further gradual downgrade of expectations occurring as the quarter has played out, belying the steady rise until last week in US stock prices. If the honeymoon is over, further solid gains may not be so easy. The big banks begin reporting later this week and then we settle in for a month of day by day individual results.

Last night's plunge in US bond yields and further speculation over QE3 will make life interesting for the US Treasury this week as it auctions three and ten-year notes and thirty-year bonds over the next three sessions. Tomorrow night brings the Fed's Beige Book report on how each district's economy is performing.

On Thursday we'll see the monthly US trade balance and the PPI for March, followed by the CPI on Friday and the fortnightly consumer sentiment measure.

It will be a big day on Friday, in the face of recent nervousness, when China reports its March quarter GDP result. Beijing will also throw in monthly industrial production and retail sales data.

Today in Australia brings both the ANZ job ads series and the NAB business confidence report along with the construction PMI, backed up tomorrow with the Westpac consumer confidence report. Tomorrow also sees housing finance and investment lending, and then the unemployment numbers are released on Thursday.

On the local stock front, this week sees the first trickle of March quarter production reports from the resources sector. We begin with Energy Resources Australia ((ERA)) today followed by Iluka ((ILU)) on Thursday. Thursday also sees the release of the Ten Network's ((TEN)) interim profit result.

Rudi will appear on Sky Business on Thursday at noon. 

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

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