The Monday Report

This story features WESTPAC BANKING CORPORATION, and other companies. For more info SHARE ANALYSIS: WBC

By Greg Peel

Friday night's US jobs report had something for both camps of the presidential race. The jobs added figure of 171,000 well exceeded consensus expectations of 120,000 and the participation rate also increased, suggesting more confidence in finding work, all of which is good for Obama. However, the latter also meant the unemployment rate ticked up to 7.9% from 7.8%, which plays into Romney's hands.

The 170,000, if accurate – and bear in mind these numbers are constantly revised – is heartening, but not substantial. Realistically, the US needs to add around 200,000 jobs per month to beat population growth if it is to meaningfully reduce the unemployment rate, which clearly in this case it hasn't. So while the Fed, which is now squarely focused on unemployment reduction as the goal of QE3, will find the October “beat” encouraging, one presumes there's nothing here to spark a rethink of current policy settings. But on Friday, Wall Street wasn't looking at it that way.

The stock indices fell from the bell and by day's end the Dow was down 139 points, or 1.1% – basically what it was up on Thursday night – while the S&P lost 0.9% to 1414 and the Nasdaq dropped 1.3%.

Going into Friday, a sell-off was always on the cards even before the jobs number was released. The market had rallied strongly on Thursday and the election is due on Tuesday, which we keep hearing is “too close to call”.  Although, what I have read of electoral college counts rather than the popular vote has Obama over the line. So a square-up was on the cards, but then along came the jobs number.

The jobs number has been held responsible for the sell-off on the basis a better than expected result reduces the need for such easy policy from the Fed. We recall that aside from the current QE3 in place, Operation Twist is still running, but due to expire at year's end. The expectation had been for an extension, but this jobs number supposedly throws that into doubt. We need look no further than a 0.7% jump in the US dollar index to 80.57 to find such an assumption.

The move, and the implications had quite an impact on gold, which fell US$36.30 to US$1678.10/oz. Commodity prices all took a beating, if you look at it in reduced stimulus terms or just US dollar strength terms. Base metals fell 1-2%, while Brent crude dropped US$2.49 to US$105.68/bbl and West Texas fell US$2.30 to US$84.79/bbl.

But a funny thing happened in the US bond market – nothing. Were investors, outside of the skittish stock market, truly worried the Fed might stop buying bonds then that should show up in the ten-year yield, but it added a mere one basis point to 1.73%. The adage is that the bond market is a lot “smarter” than the stock market, which is always an interesting accusation to track.

Which probably brings us back to the election again, given a square-up seems completely sensible. Obama may win the presidency and perhaps the Senate, but he is unlikely to win the House, which throws up a return to gridlock with the fiscal cliff looming. There are suggestions that if the Republicans lose the race they will take it on the chin and ease off on their fiscal stubbornness, lest they bring America to its knees with another four years to go. Investors will believe that when they see it.

Meanwhile across the pond, the EU leaders had a regular meeting over the weekend and decided to begin building the new uniform banking framework from January first next year. That's all well and good, but no reason to hold's one breath. Otherwise, any positive news from the meeting was overshadowed by internal rumblings in Britain's ruling Tory party about whether the UK should exit the EU given the large EU budget contribution the UK pays, the little it gets back, and questions over where the balance ends up. Talk of exiting now seems to have eased off, but UK parliamentary and cross-Channel tensions remain.

The Greek parliament will vote tonight on the new budget measures and again on November 11 to ratify Greece's 2013 budget, which will release the next tranche of bail-out funds. The Greek prime minister is confident of a positive result that he has suggested will cause all talk of a Greek exit of the euro to end “irreversibly”.

Will you tell him or will I?

China's official services PMI for October was released on Saturday and showed a bounce to 55.5 from September's two-year low 53.7. The construction services sub-measure provided a lot of the boost, but new orders fell to 51.6 from 51.8, which is not so encouraging. Today will see the release of HSBC's equivalent measure.

On the strength of the US dollar index, the Aussie is down 0.3% to US$1.0366, but after a disappointing session on the local bourse on Friday, which saw a strong open wittered away, the SPI Overnight is down only three points despite Wall Street's fall.

Enough said about the US election on Tuesday – now we wait. We may have a result by Wednesday morning or, if it really is as close as suggested, we may have to wait a bit longer.

Australia, the UK and US will all release their services PMIs today/night with the eurozone following up tomorrow. It's otherwise a quiet week for US data, with the trade balance on Thursday the only real highlight.

By contrast, there's wealth of data out in Australia this week, beginning today with the services PMI, retail sales, the trade balance, ANZ job ads, and the TD Securities inflation gauge. Tomorrow sees September quarter house prices, an RBA rate decision, and the Melbourne Cup.

Victoria is on holiday tomorrow, but the ASX is open despite the fact everyone will head off to lunch, or least head off as soon as the RBA decision is posted at 2.30pm. At this stage consensus seems to be for a cut either tomorrow, or if not tomorrow, definitely December.

On Wednesday Australia sees the construction PMI and on Thursday it’s the jobs numbers. On Friday the RBA will release a quarterly Statement on Monetary Policy.

On Friday China will provide its October dump of inflation, sales, production and investment data.

Westpac ((WBC)) will release its full-year earnings today in another week laden with AGMs. CommBank ((CBA)) will wrap up the bank reporting season with its quarterly update on Wednesday. SP Ausnet ((SPN)) will provide its full-year result on Friday.

A reminder that Rudi is on assignment in the US and as such will not be making any media appearances until later in the month.

Another reminder is also that the US went off summer time over the weekend so as of tomorrow, and through to March, the NYSE will close at 8am Sydney time.

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

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms