The Monday Report

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By Greg Peel

The half percent fall in the ASX 200 on Friday was once again all about the materials sector, which fell 1.3% on the weaker iron ore price. Things are not shaping up well for the local market today on that basis, given Friday saw another drop in the iron ore price, indeed a substantial US$3.90 to US$91.80/t. Friday night’s 8 point fall on the SPI Overnight looks optimistic.

Meanwhile, we did see another rise in China’s official manufacturing PMI over the weekend to 50.8 from 50.4 in April, beating 50.6 expectations. It’s grafting stuff but at least in the right direction, and the May result represents a five-month high. New orders provided the bulk of the increase, which bodes well for China’s economy going forward.

As to whether the PMI can offer any sort of dampener today is yet to be seen, with iron ore now perilously close to its 2012 low of US$86.70/t. A breach of the low would see prices back at 2009 GFC levels.

Wall Street won’t be offering much assistance today, despite both the Dow and S&P trading further into blue sky on Friday night to provide a 2% broad market gain for the infamous month of May. The Dow closed up 18 points or 0.1% having opened down 50 points, while the S&P gained 0.2% to 1923 as the Nasdaq slipped 0.1%.

The weak start on Wall Street was due to disappointing data releases. The Michigan Uni fortnightly consumer sentiment measure showed a fall to 81.9 from 84.1 a month ago. US personal spending fell 0.1% in April having risen 1.0% in March, marking the first decline in 2014. Economists point to the weather, again, noting the big difference from March to April was a drop in spending on heating. The good news is annualised spending is running at 4.3%, up from a low of 2.6% in April 2013.

Personal incomes, on the other hand, rose 0.2% to mark the lowest gain for 2014. Incomes have grown only 2.0% annualised, which has economists concerned over the robustness of any US recovery. The gap between 2.0% income growth and 4.3% spending growth suggests only one thing – Americans are back to reducing their savings and/or using credit. One disturbing observation is that equity draw-downs on houses are back on the rise, indeed quite rapidly, as house prices rise. At least the banks are being more careful this time (so far), not allowing the madness that was equity draw-downs in excess of 100% of house value in the pre-GFC frenzy.

Back then, Americans were drawing on the equity of their house safe in the knowledge house prices would only keep rising, to invest in the stock market which also never looked like going down again. Given very low levels of retail participation in the current bull market, even with the indices at all-time highs, one presumes this is not the case this time around. Yet.

If the money is going anywhere it’s going into US bonds. The ten-year yield was steady on Friday at 2.46% and the US dollar index dropped 0.1% to 80.39. Gold lost US$4.90 to US$1251.30/oz and the Aussie is steady at US$0.9310.

LME traders played it safe on Friday night, taking profits ahead of the Chinese PMI release and today’s public holiday in China. Copper posted the lowest fall at 0.5% but nickel bucked the trend in jumping 2%.

Rising US inventories and mixed US economic data, such as Friday’s consumer spending results, are weighing on oil prices and undermining the geopolitical premiums built therein. As each week passes without any major Russia/West confrontation, that premium is harder to maintain. Brent fell US91c on Friday to US$109.21/bbl and West Texas fell US77c to US$102.83/bbl.

As noted, the SPI Overnight was down 8 points on Saturday morning with China’s PMI pending but the 4% fall in the iron ore price may imply something a little more excessive today, given both BHP Billiton ((BHP)) and Rio Tinto ((RIO)) were down around 4% in London on Friday night.

We are nevertheless facing a crucial and data-filled week, both locally and across the globe.

Manufacturing PMIs are due for Australia, Japan, the eurozone, UK and US today and services PMI for the same group on Wednesday, while HSBC’s PMIs will run a day behind due to today’s holiday in China. Beijing will release its service sector PMI tomorrow. Australia’s construction PMI is due on Friday.

In terms of monthly data, Australia will also see building approvals, house prices and the TD Securities inflation gauge today, retail sales tomorrow, and the trade balance on Thursday. In terms of March quarter data, Australia will see company profits and inventories today, the current account, including balance of trade, tomorrow and on Wednesday the GDP is released. Economists are forecasting a 0.8% quarterly gain, matching the December quarter, taking the annual rate to 3.2% from 2.8%

The RBA will meet tomorrow but little change is expected in the policy statement and no change is expected in the cash rate.

It’s jobs week in the US, with the ADP private sector number out on Wednesday and non-farm payrolls on Friday. The US also sees construction spending tonight, factory orders and vehicle sales on Tuesday, the trade balance and Fed Beige Book on Wednesday and chain store sales on Thursday.

Overriding all data releases and other economic influence this week will be the ECB policy meeting on Thursday night. The central bank is expected to cut its cash rate from 0.5% and either introduce or flag some form of QE ahead after having done nothing but talk about the possibility for many months. Look out if it doesn’t.

The ECB would have noted an alarming fall in German retail sales data released on Friday night, showing a 0.9% drop in April when economists had expected a 0.4% gain. Critical to the ECB decision is eurozone inflation, or lack thereof, and a flash estimate of the May CPI will be released tomorrow night. The first estimate of eurozone March quarter GDP will be revised on Wednesday night, although no change is expected to the initial 0.9% result.

New Zealand is on holiday today.

We’re now basically through the recent result mini-season for Australian corporates as we enter the usually quiet period, disclosure-wise, before end of financial year. There are still a handful of updates scheduled for this month nevertheless, including Challenger ((CGF)) on Wednesday, and there may yet be last minute “confession session” downgrades lurking.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm and on Thursday at noon and again between 7-8pm for the Switzer Report.
 

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

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