The Monday Report

This story features CSL LIMITED, and other companies. For more info SHARE ANALYSIS: CSL

By Greg Peel

To recap on the correction so far, the initial drop took the ASX200 down to 5001 which marked the first bottom on a closing price basis. The next day it traded down to 4928 intraday, but closed at 5137. On the rebound, the closing price peak was 5263 (5303 intra) before the second wave of selling last week took us back down to 5027 on Thursday (4995 intra).

Friday was a nothing day, in which the ASX200 bungled along the flatline going nowhere much before closing up 12 points at 5040. It was very “Friday”, after another week of volatility and ahead of both the US jobs number on Friday night and the US holiday tonight.

We may conclude that the 5000 level, which offered impenetrable resistance from 2009 to 2013, is now the solid base of support. A close below that level would likely suggest more downside. The story would be different, nonetheless, were 5000 to hold right through the difficult month of September, which this week includes a raft of August Chinese data, next week the Fed meeting, and maybe by month’s end a Greek election.

No Clear Signal

Wall Street was nervous before the opening bell on Friday night, having seen selling pressure impacting on the Japanese stock market on Friday, which fell 2.2%, rolling into pressure in Europe, resulting in falls of 2.8% in France, 2.7% in Germany and 2.4% in the UK. It was all going to come down to the non-farm payrolls report.

Wall Street had expected 220,000 jobs, so the 173,000 result was a clear miss. However, this number alone does not tell the full tale.

Firstly, it had been widely discussed prior to Friday night that the first August number almost always comes in low, before subsequently being revised higher. It’s all to do with August being the summer shut-down month, similar to January in Australia. Thus the market was ready for a weak initial reading.

As it was, the August result included upward revisions to the July and June numbers, such that 173,000 still provided for a three-month rolling average of 200,000 plus. Then there’s the unemployment rate, which fell to 5.1% from 5.3% in July. The Fed has stated that it considers “full” employment to be 5.0-5.2%. Thus as far as the Fed is concerned, employment is now full, for the first time since April 2008.

For the past year there has been concern that while the unemployment rate has been falling, it has not been accompanied by wage growth, which supports inflation. August wage growth came in at 0.3%, beating 0.2% expectations. At 2.2%, year on year wage growth is the strongest it’s been in four years.

So overall, was it a “good” jobs report or a “bad” jobs report? It rather depends on who you ask.

The US stock market said “good” because the unemployment rate has fallen into the Fed’s target zone. That suggests lift-off at next week’s Fed meeting, and for the stock market, that’s taken as “bad”. The Dow fell on the open, traded to down 350 points around 2.30pm, rebounded to be down 200 points at 3.30pm and closed down 270. But if the jobs numbers were a clear green light to the Fed, we would expect to see both the US dollar and US bond rates rise.

The US dollar index fell 0.2% to 96.22 and the US ten-year bond yield fell four basis points to 2.14%. We recall that at the height of Fed rate rise speculation this year, the dollar index has been at 100 and the ten-year has been at 2.50%.

Meanwhile, commodity prices all fell, suggesting commodity traders believe it’s a green light for the Fed and thus the US dollar will have to rise.

So what are we to make of it all? Economists are largely split down the middle on September or December, with some outliers suggesting next year. Some suggest the Fed cannot raise when the markets are volatile, others say it is not the Fed’s mandate to placate the stock market. Some say the Fed cannot raise due to the threat of an accelerated Asian currency crisis, others say the rest of the world is not the Fed’s responsibility.

Many, like myself, simply say please get it over and done with. I continue to believe this is the way the Fed is feeling too.

Commodities

LME traders clearly took the US jobs report as ominous in Fed rate rise terms, given nickel fell 0.5%, aluminium, tin and zinc fell 1% and copper and lead fell over 2%.

Iron ore fell US80c to US$55.00/t.

West Texas crude fell US94c to US$45.71/bbl and Brent fell US97c to US$49.58/bbl.

Typically, gold takes a while to react, and hence Friday night gave us little indication of interest rate views given gold fell US$2.10 to US$1122.80/oz.

What is the Aussie telling us? I suggested on Friday morning that 70 appeared to be a line in the sand for now, but that idea was quickly kyboshed. On the break of 70, the Aussie fell sharply and is down 1.5% at US$0.6911. We haven’t seen the Aussie in the sixties since 2009. But are we seeing Fed speculation or ongoing Chinese slowdown fears? There is a raft of Chinese data releases due this week.

One thing’s for sure – the forex market is very short Aussie at present, hence sharp rebounds are on the cards.

The Week Ahead

The SPI Overnight closed down 28 points or 0.6% on Saturday morning which, if accurate, would take the ASX200 back down towards the 5000 level again today.

Tomorrow Beijing will release China’s August trade data. On Thursday the inflation numbers are due, and the weekend sees industrial production, retail sales and fixed asset investment. Chinese markets reopen today after two days off last week.

Wall Street is closed tonight for Labor Day, before consumer credit data tomorrow night, wholesale trade on Thursday and the PPI and fortnightly consumer sentiment on Friday.

The RBNZ and Bank of England will both hold policy meetings on Thursday.

In Australia, we see the construction PMI and ANZ job ads today, NAB business confidence tomorrow, and housing finance and the Westpac consumer confidence on Wednesday. Thursday brings our own August jobs numbers.

Quite a lot of stocks go ex-div this week, including CSL ((CSL)) and Insurance Australia Group ((IAG)) today.

Westpac ((WBC)) will hold a strategy meeting today and Boral ((BLD)) will host an investor day on Wednesday. Sigma Pharmaceuticals ((SIP)) will release its interim result on Thursday.

Rudi will appear on Sky Business 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.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms