The Monday Report

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By Greg Peel

There was an element of squaring up on Friday across the globe ahead of a significant week of economic data releases. Wednesday brings the first estimate of US June quarter GDP on the same day as the Fed issues a monetary policy statement, while Thursday offers up the global round of monthly manufacturing PMI numbers and on Friday it’s US non-farm payrolls.

The stock market was flat in Australia on Friday and weak in the UK and Germany, ahead of the US market which fell on the open to be down 150 Dow points at 11am. The US plunge was not about corporate earnings, given the two major releases of the day cancelled each other out: online travel service Expedia saw its shares fall 27%, while alleged coffee vendor Starbucks saw its shares surge 7%. Nor was it about economic data, given the only release of note was the Michigan Uni fortnightly consumer sentiment gauge, and it rose to 85.1 from 84.1. It was all about a US stock market sitting at dizzy heights, a less than exciting earnings season, and concern over the two main elements in focus at present: Fed policy and Chinese policy.

Wall Street spent all last week trying to retrace, with no success. And nor did the short-sellers manage to achieve anything on Friday, as after bottoming at 11am the indices spent the rest of the session grafting back to the flatline. Ultimately, the Dow closed up 3 points, the S&P rose 0.1% to 1691 and the Nasdaq added 0.2%.

The US earnings season to date continues to be viewed as “good enough”. The financial sector has been the star performer, but the banks continue to offer up risk in the form of as yet unknown regulation changes (the spectre of forced commercial/investment bank separation still lingers) and, more recently, a forced exit from physical commodity warehousing. Outside of the financials, the balance of companies reporting to date has seen a 63% beat on earnings forecasts. That’s pretty good, except that forecasts were very low going in. The real problem is that only 4% has managed to beat on revenues.

It is hard to see just how the US economy can recover healthily and offer up new employment when revenues are simply not growing, and have not been since the GFC. Earnings growth can be achieved through cost cutting, and costs include workers. Yet the picture for the September and December quarters ahead appears brighter, on a forecasts basis, with consensus September forecasts suggesting 6.6% earnings growth and 3.3% revenue growth, and December’s suggesting 11.8% and 1.1% respectively. Expectations of a better second half for the US are underpinning expectations that the Fed will begin to taper before the end of the year.

Many have pencilled in the first QE reduction in September, which makes this week’s Fed policy statement and jobs numbers crucial. Yet the fact that Wall Street has been trying, but failing, to pull back from all-time highs has a lot to do with expectations from the other side of the fence: that the Fed will not find itself tapering this year given the US economy is just not recovering that strongly.

Meanwhile over in China, fears linger over the government’s reform package and attempts to rein in shadow banking, and the potential impact of that policy. The news from China swung backward and forward last week, with a weak manufacturing PMI estimate causing concern and then the premier’s announced “floor” of 7% growth offering some relief. Then the government announced on Friday it will shut down excess out-dated capacity across nineteen manufacturing industries including aluminium and copper processing.

The announcement is a two-edged sword. The communist-style persistence of Chinese manufacturers to continue to pump out product despite a slowing economy, falling demand and falling margins, including into loss-making, has long troubled economists and added weight to “hard landing” warnings. The build-up of inventories of steel, metals and other products has led to sharp de-stocking phases which add volatility to global prices. In the wider scheme of things, a reduction in excess Chinese capacity is a step in the right direction.

On the other hand, the government’s move to shut down capacity in the likes of aluminium and copper production implies recognition of insufficient demand. Hence Friday night saw a weak session on the LME, with aluminium, lead and zinc down over 1% and copper and nickel down over 2%.

The price falls came despite a slightly weaker US dollar, which fell 0.1% on its index to 81.66. Gold was steady at US$1333.80/oz, while lower metal prices have not upset the Aussie, which is also steady at the top of its recent range at US$0.9267.

For once the Chinese weakness theme passed through to the oil markets, with Brent down US46c to US$107.17/bbl and West Texas down US$1.00 to US$104.70/bbl. However that theme might change tonight given deadly escalation in Egyptian unrest over the weekend.

Spot iron ore continues to sail merrily on nevertheless, seemingly oblivious to the world around it. It’s up US50c to US$132.60/t.

And weaker base metal prices have not had much effect on the SPI futures, with Friday’s SPI overnight up 8 points.

Consensus forecasts have US June quarter GDP growth at 1.0%, down from March’s 1.8%. That’s pretty poor, and hardly the stuff to inspire expectations of rapid Fed tapering, but as noted above it is much healthier expectations for the second half of 2013 that are driving the one side of the market assuming tapering sooner rather than later. GDP releases are rather backward-looking, and Wednesday’s first estimate will be revised at least twice in the next three months before being booked.

US jobs data, on the other hand, is posted one week after the end of each month, and thus is a lot more “present tense”. Given the first posting is a small-sample estimate, major revisions often subsequently follow, but it is not like Wall Street to wait around for revisions. Thus Friday’s number will be critical for the game of Fed-guessing. But then a lot will depend on what the Fed policy statement says on Wednesday, ahead of the jobs numbers. The failure of Wall Street to lose ground last week implies expectations of a “dovish” tone.

Tonight in the US sees pending home sales and Tuesday brings the Case-Shiller house price index and the Conference Board consumer confidence measure. Wednesday it’s the GDP and Fed policy statement along with the Chicago PMI and the ADP private sector jobs numbers. Thursday it’s the manufacturing PMI and construction spending, ahead of factory orders, personal income and spending, and non-farm payrolls on Friday.

Amidst all of this, the US earnings season rolls on. Highlights this week include Dow components Merck, Pfizer, US Steel, Proctor & Gamble, Exxon and Chevron, along with Mastercard, ConocoPhillips, and results from Deutsche Bank and UBS.

Japan will release retail sales, unemployment, industrial production and manufacturing data across the week, while China (HSBC), the UK and eurozone will also offer manufacturing PMI numbers.

Australia’s manufacturing PMI is also out on Thursday, following building approvals on Tuesday and private sector credit on Wednesday. Additional releases on Thursday include new home sales and the RP-Rismark house price index. On Friday it’s the June quarter PPI.

The tail end of resource sector quarterly production reports is upon us this week, with Evolution Mining ((EVN)), AWE ((AWE)), Beach Energy ((BPT)), Whitehaven Coal ((WHC)), Aurora Oil & Gas ((AUT)) and Origin Energy ((ORG)) among the reporters. Woolworths ((WOW)) will release quarterly sales numbers tomorrow.

The results season also begins to build up this week, with Intrepid Mines ((IAU)), Credit Corp ((CCP)), Navitas ((NVT)), Energy Resources Australia ((ERA)), Paladin Energy ((PDN)) and Transurban ((TCL)) among the highlights. ResMed ((RMD)) will report quarterly earnings on Friday.

Rudi will appear on Sky Business today at 11.15am, Wednesday at 5.30pm, Thursday at noon and again at 7-8pm for the Switzer Report.
 

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

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