The Overnight Report: Global Growth In Question

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By Greg Peel

The Dow closed down 167 points or 1.0% while the S&P fell 0.9% to 1870 and the Nasdaq lost 0.8%.

Bridge Street gave a tepid thumbs-up to the budget yesterday having had more time to sift through the changes and evaluate the implications. Analysts agree the budget is economy-, and thus stock market-, “neutral”, which is an improvement on fears held before Tuesday night. All sectors rallied slightly yesterday except consumer discretionary and materials, which were flat.

Japan’s March quarter GDP came in at a whopping 5.9% annualised, blowing away forecasts of 4.0%. After a disappointing December quarter despite Abenomics-driven stimulus, quarter on quarter growth of 1.5% represented a major acceleration. But is it all a mirage?

Japan’s GST was increased in April (Australia beware) to 8% with an option to go to 10% by 2015. Whatever Japanese consumers were planning to buy, they did so before the end of March. The June quarter may well see tumbleweeds rolling down Tokyo’s shopping malls, so a true evaluation of Japan’s current economic performance will need to wait at least three months.

Which is not the case in Europe. The eurozone GDP came in at an anaemic 0.2% quarter on quarter growth, falling short of 0.4% expectation, for an annualised rate of 0.8%. All the heavy lifting was done by Germany, which individually posted a 0.8% qoq gain for 3.0% annualised. Clearly the more troubled regions of the bloc are not out of the woods yet by any stretch of the imagination. With zone inflation running at a mere 0.7%, and 2% GDP growth considered the threshold to bring down rampant unemployment, it seems a pretty good bet the ECB will act next month, as the central bank has flagged.

It was pandemonium in European bond markets last night. As I noted yesterday, commentators around the globe have been shaking their heads in disbelief at the amazingly low rates to which the bond yields of the likes of Italy and Spain – largely economic basket cases – had fallen. And that a healthy economy like Germany’s should command a ten-year yield of only 1.3%. Last night Germany’s yield fell a couple more basis points, but Spain’s yield jumped 20bps, Italy’s 22bps and Portugal’s 22bps. France and the Netherlands saw their yields tick down one pip.

The Bundesbank, which for some time has been against the notion of a eurozone QE program, is now urging the ECB on.

Outside of Germany, the safe havens include the UK and US. The UK’s economy appears to have recovered quite impressively from the GFC but the Bank of England has cautiously declared it is not looking to raise its cash rate anytime soon. The UK bond fell 2.5bps last night. The US recovery is very much in question even as the Fed tapers QE, but then there are few left who don’t want to see QE finally shut down. Last night the US ten-year fell another 4bps to 2.5%, or 2.496% to be precise.

The most frustrating thing for analysts bullish the US economy, post-snow, is that all the little ducks just won’t line up in a row. Last night’s releases brought more frustration.

The Empire State (New York) manufacturing index surged to 19.0 for May when economists had expected 5.4. The Philly Fed equivalent slipped to 15.4 from 16.6 in April but beat 14.3 expectations (and given this measure is zero-neutral, is still raging).

Weekly new jobless claims fell to their lowest level since 2007. The fall of 24,000 took the number to 297,000.

Industrial production fell 0.6% in April having risen 0.9% in March. Economists expected a flat reading. The swing is all to do with heating, with households having run their heaters ragged in the winter and quickly switched off in the thaw.

Housing market sentiment has fallen to 45 in May to its lowest level in twelve months, from 46 in April. This measure is 50-neutral, hence builders are increasingly pessimistic. The housing market, suggested Janet Yellen in her last statement, is an area providing the Fed with a little concern. Rarely does the Fed single out areas of the US economy beyond its mandated watch on employment and inflation.

Speaking of inflation, the US headline CPI jumped 0.3% in April for a 2.0% annual rate, up from 1.5% in March. It’s the biggest rise since last June, but the core annual rate remains below the Fed’s 2% comfort zone at 1.8%, and indeed has printed between 1.6% and 1.8% for twelve months now.

The US stock market is starting to take a little more notice of the (supposedly more astute, and exponentially larger) US bond market. Having been happy with March quarter earnings, the stock market has been looking forward to earnings acceleration in subsequent quarters, in line with GDP growth forecasts of up to 4%. The indices saw new highs last week. Is the stock market in denial?

If we take out a misleading Japan, it is clear China and Europe are slowing, the UK is strong but the BoE remains wary, and the US is just not coming through as was forecast late last year, when tapering began. Does the bond rally ultimately represent a bubble that must burst, or will global growth forecasts start to be pared back?

On the balance, the US dollar index was steady last night at 80.04. Gold rallied on Wednesday night on the strong US PPI – an easily explainable response – and then last night fell by US$9.60 to US$1296.50/oz. Global disinflation?

Nickel rolled over on Wednesday night big-time and carried on with it last night, falling another 6.4%. All metals were weaker on the global economic news, although copper was relatively resilient with a 0.4% fall. Iron ore fell US70c to US$102.80/t.

The oils were mixed, with Brent rising US30c to US$110.44/bbl (on expiry) and West Texas falling US80c to US$101.57/bbl.

The SPI Overnight fell 29 points or 0.5%. Yesterday’s small rally took the ASX 200 over the 5500 mark, to 5520, and today no doubt the 5500 bogie will be in play yet again.

The US will see housing start and consumer sentiment data tonight while PNG partners Oil Search ((OSH)) and Santos ((STO)) will hold their AGMs today.

China will release property price data over the weekend. Be afraid.
 

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