The Monday Report

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By Greg Peel

The suggestion on US business television on Friday was that President Obama is favouring former US Treasury secretary Larry Summers over Fed vice-chair Janet Yellen to replace current Fed chairman Ben Bernanke in 2014. Summers is seen as the more hawkish of the two, suggesting QE would be wound down faster and interest rates increased more rapidly under his command.

The benchmark ten-year bond yield jumped another 7 basis points to 2.83% on Friday as bondholders exit US Treasuries at pace on ever growing tapering expectation. The ten-year yield bottomed out in mid-May before the first tapering talk, and has since risen 75% to post the fastest move (fall in bond prices) since 1962. It is now as high as it was in July 2011.

Rising bond yields undermine the value of equity dividends, and as we know, yield stocks have been the investment of choice around the world now for some time. US stock indices suffered sharp falls last week, with the Dow in particular having its worst week of the year (down 2.2%). On Friday the Dow fell another 30 points or 0.2% while the S&P lost 0.3% to 1655 and the Nasdaq dropped 0.1%.

Stocks fell on September tapering expectations, Fed chairman speculation, and rising fear of the upcoming debt ceiling debate in Congress. Stocks fell on rising bond yields. Bond yields are rising for the same reasons, but rising bond yields normally imply an improving economy. Which leads us back to the argument once more: if the Fed starts tapering because of a strong economy, it is ultimately good for equities; if the economy is not strong enough and tapering starts anyway, it is not good for stock market confidence.

The Michigan Uni fortnightly consumer sentiment measure showed a drop on Friday to 80.0 from 85.1 two weeks ago. Economists had expected 85.1. Housing starts rose 5.9% year on year in July but were boosted by lump apartment blocks, with single family home starts falling 2.2%. Productivity rose by a better than expected 0.9% in the June quarter.

US economic data remain mixed. They are not bad, but representative of a modest recovery at best. This is why, despite stock and bond market speculation, not everyone believes the Fed will begin tapering in September. Bernanke may nevertheless suggest a tapering timetable at the September meeting, and talk is that he may like to see the winding back of his QE policy begin before he departs, providing a “job done” exit.

The US dollar index ticked up only slightly on Friday to 81.29 despite the big jump in bond yields. Gold again confounded by rising US$11.50 to US$1377.20/oz. If tapering begins, gold should fall, but then it did fall a long way when tapering talk first began. Talk now is of substantial physical demand at these lower levels, one again exciting the gold bulls.

There is also a more positive tone now on the LME. Tapering should imply a stronger US dollar, and thus weaker dollar-denominated commodity prices, all things being equal. But all things are not equal if traders are now becoming more confident about Chinese growth, or at least less fearful, and hence aluminium, lead and zinc all jumped close to 2% on Friday and tin 1%, with copper and nickel posting slight gains.

In the oil market, US traders continue to nervously watch the developments in Egypt, and to watch the first tropical storm of the season. Erin has proven to be a fizzer, but provides a reminder of what may yet arrive. West Texas rose US62c to US$107.95/bbl while Brent was almost unchanged at US$111.17/bbl.

On the other hand, spot iron ore took a bit of a tumble on Friday, falling US$3.30 to US$137.90/t. The price has spiked up recently and a correction was arguably due.

The Aussie is up half a cent to US$0.9186.

The SPI Overnight fell 7 points.

Over the weekend, Chinese property price data were released showing a 7.5% rise in July year on year on the national average, including a 14.1% gain for the Beijing region, up from 12.9% in June, and a 13.7% gain for the Shanghai region, up from 11.9% in June. The government maintains that property price inflation is “low”. These numbers don’t look all that low.

China will be back in the frame this week on Thursday with the release of HSBC’s flash manufacturing PMI estimate for August. The eurozone and US will see similar flashes.

The minutes of the August Fed policy meeting are due out on Wednesday. The minutes are unlikely to tell us anything we don’t already know, with the September meeting being the one expected to provide more clarity, but Wall Street will jump at any shadows anyway.

Outside of the minutes, this week’s US data releases include the Chicago Fed national activity index tomorrow and existing home sales on Wednesday. Thursday it’s the Conference Board leading index, FHFA house prices and the flash PMI. Friday it’s new home sales.

In Australia we’ll see vehicle sales today and the minutes of the August RBA meeting on Tuesday. In this case economists will be looking for clues of another rate cut.

Australia’s week will nevertheless be dominated by the busiest week on the calendar for corporate earnings results. There are far too many due to list weekly highlights, so please refer to the FNArena calendar (link below) for release dates and the FNArena Reporting Season Monitor for result summaries.

Highlights today include Amcor ((AMC)), Bluescope ((BSL)), Challenger Financial ((CGF)) and Mt Gibson Iron ((MGX)). CommBank ((CBA)) will go ex-dividend.

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

NOTE FROM THE EDITOR

Economic data have started to surprise on the upside, including recent PMI surveys and Chinese indicators. This has prompted suggestions from the more optimistic forecasters that global growth is looking in much better shape for the second half of the calendar year. If correct then the recent switch into resources stocks will have further to run.

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

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