The Monday Report

This story features COCHLEAR LIMITED, and other companies. For more info SHARE ANALYSIS: COH

By Greg Peel

Friday’s session on Bridge Street featured no typical drift-off after all, as investors enthused over positive data from everywhere other than Australia. Funny how one minute the weak HSBC PMI for China is the primary focus but quickly forgotten the next if Beijing’s number looks positive. Nevertheless, a close above 5100 for the ASX 200 is the highest since the May peak over 5200, and a falling Aussie dollar is providing encouragement. The Aussie was down another 0.3% to US$0.8907 by Saturday morning.

We also now have an election date, September 7, which at least removes that uncertainty.

On Wall Street it was all about jobs, as usual. Excitement has been building with respect to the US economy so despite consensus forecasts sitting around 180,000 job additions, the so-called “whisper number” had crept over 200,000. Often such excitement leads to disappointment, and so it was the number came in at 162,000. The official unemployment rate fell to 7.4% from 7.6%, to the lowest level since December 2008, but only because a number of jobless abandoned their search. And June’s strong number was revised down.

How to respond? It was not a great result, compared to expectation, but not a shocker either. Wall Street fell initially on the news, in Dow terms down 69 points, but spent the rest of the session ever so quietly rallying to the bell. The Dow closed up 28 points or 0.2% and the S&P gained 0.2% to 1709 – further blue sky for both – while the Nasdaq added 0.4%.

Yet again we see the “Bernanke put” at work, with weaker than expected data offering the possibility the Fed will not begin tapering too soon. It was nevertheless interesting to hear FOMC member James Bullard suggesting in a speech on Friday that the Fed needs to see more data before deciding whether or not to begin tapering. This contradicts Bullard’s typical stance as the most hawkish of FOMC members, but no doubt he feels that if he is in contention to take the chairmanship role next year, he’d better start towing the party line.

There were other US data releases on Friday. Personal spending rose 0.5% in June, in line with expectations, but income growth fell short of 0.5% expectation at 0.3%. It’s a mixed result, given incomes need to grow to encourage more spending assuming households are now more wary of debt. Factory orders rose 1.5% in June but economists were hoping for 2.3%. The recent data flow suggests talk of September tapering may be premature, yet still many on Wall Street believe September will see the first trim.

Earnings results continue to be mixed as well. Chevron (Dow) matched rival Exxon (Dow) by posting a miss, losing 1% on the day. On the other hand, GFC victim AIG announced it would pay its first dividend since 2008 and Facebook-for-grown-ups, Linkedin, posted a big beat which saw its shares up 11%.

After its strong surge on Thursday night, the US dollar index fell back on Friday night on the weaker jobs number, down 0.5% to 81.93. This did not impact on the Aussie, as noted above, and nor did gold feel any more comfortable, posting only a US$2.70 gain to US$1313.50/oz. The US ten-year bond rate, however, which had shot up 13 basis points on Thursday, fell back 12bps to 2.60%.

The weaker greenback helped base metal prices to a relatively stable session although the oils bowed to the jobs number, with Brent down US37c to US$108.95/bbl and an increasingly more volatile West Texas down US$1.01 to US$106.88/bbl.

Spot iron ore rose US40c to US$130.10/t.

The SPI Overnight rose 9 points or 0.2%.

On Saturday Beijing reported its official service sector PMI for July, showing a rise to 54.1 from 53.9. The service sector accounted for 46% of Chinese GDP in 2012 and overtook manufacturing as the biggest employer in 2011. Beijing has announced several measures to support the small firms that make up the sector, providing tax relief, cutting red tape and foreign exchange rules and making it easier for small companies to issue bonds.

HSBC will release its measure of China’s service sector PMI today, while the eurozone, UK and US will report their equivalents tonight. Australia would normally join in the chorus but this time not until tomorrow, presumably because it is a bank holiday in NSW today, which should ensure the market is a little quieter than usual.

It will be a very busy week for Australian data nonetheless. Today sees retail sales and the TD Securities monthly inflation gauge. Tomorrow it’s the services PMI along with the trade balance, June quarter house price index and ANZ job ads. Wednesday it’s the construction sector PMI, housing finance and investment lending, and Thursday brings our own jobs numbers.

The RBA will meet tomorrow and by all accounts is expected to cut the cash rate by 25 basis points to 2.5%. The cut became as good as a certainty last week, as far as the market is concerned, when governor Glenn Stevens made a candid speech in which he suggested in not so many words that the Australian economy is in need of assistance. The RBA will also issue its third quarter Statement on Monetary Policy this Friday.

China will release its trade balance on Thursday, followed on Friday by a data dump of inflation, retail sales, industrial production and fixed asset investment numbers.

It’s a quieter week for data in the US this week, with the service sector tonight, trade balance tomorrow and chain store sales on Thursday the highlights. The US earnings season is now into its lingering tail.

The Australian reporting season, by contrast, is just starting to hot up. Release highlights this week include Cochlear ((COH)) and Downer EDI ((DOW)) tomorrow, Rio Tinto ((RIO)) and Telstra ((TLS)) on Thursday and Tabcorp ((TAH)) on Friday, among various others.

Rudi will appear on Sky Business today at 11.15am, Wednesday night at 5.30pm and Thursday at noon.
 

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