The Overnight Report: Summertime Blues

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By Greg Peel

The Dow fell 46 points or 0.3% while the S&P lost 0.2% to 1707 as the Nasdaq rose 0.1%.

The RBA will meet today and as far as anyone is concerned will cut the cash rate to 2.5%. Glenn Stevens’ dovish speech last week was enough to lock in expectations and yesterday’s retail sales number did little to upset that view, with sales growth flat against expectation of a 0.4% rise. Retail sales are now growing at their slowest rate since 1961.

Nor did the TD Securities monthly inflation gauge alter perceptions, despite the trimmed mean measure coming in at 3.1%, up 0.6%. In theory this is above the RBA’s target range and might otherwise prevent a rate cut but for compilers TD and the Melbourne Institute themselves suggesting the result is a bit of an anomaly given rebasing in July 2012.

The sluggish sales number was enough to send the Aussie below 89 in yesterday’s trade although with the market already expecting a rate cut, the currency is back at US$0.8927 this morning, up slightly since Saturday morning.

Yesterday was global service sector PMI day except in Australia where it was Picnic Day for bankers, so we can prepare for that dose of dreariness today. Without Australia, the rest of the world’s service PMI numbers look excellent. Saturday’s release from Beijing showed a rise to 54.1 from 53.9 in China, with yesterday’s HSBC number suggesting 51.3 (51.1). The eurozone almost hit expansion at 49.8 (48.3) but the good news is the eurozone composite PMI, which nets manufacturing and services, has hit 50.5 to mark its first expansion in 18 months.

What on earth is going on in England? The UK PMI jumped to a surging 60.2 (56.9) and sure enough rain on the last of the third test means England has retained the Ashes. I suggest we all steer clear of Poms today. Meanwhile, the US PMI was also healthy at 56.0 (52.2).

August in the US is akin to January in Australia with Congress in recess, schools out, businesses shut down and beaches full. It is typically a time for low volumes on Wall Street and last night registered the lowest this year in what has not been a year for heavy trading. Stock indices are poised in blue sky territory, the earnings season has almost concluded and taper-talk continues to keep investors a little wary.

On that note, Dallas Fed president, FOMC member and known hawk Richard Fisher suggested last night that a 7.4% unemployment rate was enough to suggest tapering will begin soon, although he did not specifically mention September. There is a growing feeling the Fed will hold off to at least October given the September FOMC meeting falls a couple of days before the German general election. Merkel is expected to win but if she doesn’t, we could see another wipe out in Europe, which is not really the time for the Fed to be making significant policy changes.

The US dollar index drifted down slightly to 81.87 last night while Fisher’s words had gold falling US$11.30 to US$1302.20/oz and the US ten-year bond yield rising 4bps to 2.64%.

Commodity markets were mixed and largely quiet last night with base metals all moving slightly in either direction and the oils both off a tad, with Brent down US25c to US$108.70/bbl and West Texas down US45c to US$106.49/bbl.

Spot iron ore rose US10c to US$130.20/t.

The SPI Overnight fell 9 points.

The US trade balance is out tonight but it will be a busy day in Australia ahead of tonight’s session. Economically, we’ll see our own trade balance, service sector PMI and June quarter house price index along with ANZ job ads and the RBA rate cut.

On the local earnings season front, reports are expected today from Challenger Diversified Property ((CDI)), Cochlear ((COH)) and Downer EDI ((DOW)).
 

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