The Monday Report

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By Greg Peel

The US non-farm payrolls report, released on Friday, showed 113,000 jobs added in January against expectation of 190,000. As a result, the Dow rose 165 points or 1.1%, the S&P rose 1.3% to 1797 and the Nasdaq rose 1.7%. Wall Street finished higher for the week despite the Dow falling 300 points on Monday.

As to why the weak number was seen as a positive is not exactly clear.

The weather in January also featured heavy snow, but not quite to the transport-crippling level of December. Thus does this consecutive weak number, following December’s shock 74,000, confirm the weather impact, or indeed, as others maintain, suggest there is more to the weakness than just weather? Has the US economic recovery slowed?

If it is the weather, then the “good news” is the US economy is probably still on track, or at least will be if things can just warm up a bit. Last week’s soggy January manufacturing number, which sparked the abovementioned 300 Dow fall, was also blamed on the weather. If it is not the weather, and indeed the US economic recovery has stalled, then the “good news” is this implies the Fed may need to rethink the speed of its tapering program.

Just to confuse the issue, the unemployment rate fell to 6.6% from 6.7% in December and the participation rate rose to 63.0% from December’s 35-year low of 62.8%. Wall Street has been watching the unemployment rate fall in past months but dismissing a lot of the relevance given an endlessly falling participation rate. This rise is perhaps a glimmer of hope, which is “good news”.

So take your pick. If we look to other markets, however, we see a leaning towards the “weaker economy” argument and Fed implications. The US ten-year bond yield fell 3 basis points to 2.67%, the US dollar index fell 0.3% to 80.67 and gold rose US$10.60 to US$1268.00/oz. These are all moves which suggest an expectation of, or at least a belief in the possibility of, the Fed rethinking its current apparent course of US$10bn six-weekly cutbacks in bond purchases. (The Fed meets every six weeks).

Base metal markets were unsure how to respond to the US jobs numbers. Nickel rose 1% but the other metals barely troubled the scorer. It was a different story for the oils.

Brent crude jumped US$2.32 to US$109.57/bbl on Friday night and West Texas jumped US$2.30 to US$99.88/bbl, having breached the hundred dollar mark intraday. While Wall Street’s “positive” response to the jobs numbers was cited as the driver, there are also supply factors in the background. The Big Freeze in the US has drained the country’s heating oil stockpiles at a time when US refiners begin their annual maintenance shutdowns. And to top things off, maintenance has been extended at Britain’s largest North Sea oil field.

Spot iron ore fell US10c to US$120.90/t.

The Aussie is steady at US$80.67.

The SPI Overnight rose 37 points or 0.7%.

A week is a long time on Wall Street. This time last week the stock market was looking decidedly nervous after a soggy start to the new year, earnings results that satisfied but did not engender exuberance, and Fed policy many believed was a case of too much too soon.  All it took was a weak manufacturing PMI and Wall Street tanked on the Monday, prompting calls that the long awaited correction was now on. Sit back and enjoy, said the pundits, for corrections are healthy for bull markets.

It all lasted about five minutes, and we’re back where we started. Wall Street has only managed a 5% pullback. The market is now split between those suggesting the pullback is in place and we can all move on, and those suggesting a more extensive correction is still to come.

Earnings results in the tail end of the season have mostly been positive and it appears earnings growth expectations have been met on a net basis. This is not enough to alone justify elevated PEs, so Wall Street will need to see further improvement. Revenues growth, on the other hand has continued to disappoint.

The Australian result season has only just begun and will step up a gear this week. Bridge Street is in the same position of needing solid results to justify high PEs, with “misses” quite likely to trigger sharp reactions in individual stocks. This week brings numbers from Cochlear ((COH)), Boral ((BLD)), Commonwealth Bank ((CBA)), CSL ((CSL)), Primary Healthcare ((PRY)), Rio Tinto ((RIO)), Telstra ((TLS)) and Newcrest Mining ((NCM)), just to name a few.

There is also a raft of local economic data due, including house prices, housing finance and investment lending tomorrow along with the NAB business confidence survey, the Westpac consumer confidence survey on Wednesday and our own jobs numbers on Thursday. The RBA has suggested rates are now on hold for some time, and economists are split on whether the bottom is in or there’s another cut to come down the track. Unemployment numbers are key to dovish sentiment.

China will release its trade balance on Wednesday and its inflation numbers on Friday.

The eurozone will release the first estimate of its December quarter GDP on Friday.

The earnings season is all but over in the US, while economic data this week include business inventories and retail sales on Thursday, and industrial production and consumer sentiment on Friday.

Japanese markets are closed tomorrow.

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

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

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