FYI | Jul 09 2007
By Greg Peel
First to China. Exactly what is going on in that stock market is anyone’s guess, as the Shanghai Composite posted an almost 5% rally on Friday. This followed a 5% fall on Thursday, which was again put down to anticipation of a rate rise after the close of trade on Friday. The rate rise didn’t happen, but the market never waited to find out.
Conflicting growth figures were released in China in the past week (See “Chinese Growth Hiccup In Q3?”; Asia; 06/07/07) but analysts suggest the more up to date figure shows a likely weakening of Chinese industrial production in the third quarter. This is not consistent with a stock market rally, unless a pullback from runaway growth levels to a more sustainable pace is considered a positive. Somehow it’s hard to see greenhorn Chinese retail investors figuring that one out. Maybe more luck was found in the other growth figure.
While China may remain confusing, Wall Street seemed no less confused on Friday following the release of the June employment data. 132,000 new jobs were created, and unemployment remained unchanged at 4.5%. Both numbers were in line with expectations. However, both the April and May figures were revised to add another 75,000 new jobs, which wasn’t expected.
For equity markets, it was supposedly a sign that Goldilocks was alive and well and enjoying her porridge. Moderate jobs growth, combined with last week’s moderate economic growth as provided by the ISM numbers, along with strong employment, all add up to an economy just riding along nicely thank you, according to the bulls – not too cold and not too hot. Hence the Dow rallied 45 points.
But over in the bond market, interpretations were different. On release of the jobs data the ten-year bond yield – which had actually closed below 5.00% prior to the July 4 holiday – leapt up to 5.20%. It eventually settled at 5.18% at the end of the session. As far as trigger-happy bond traders are concerned, these jobs data, and particularly the revised numbers, are more inflationary than not.
But the annual rate of jobs growth in the US is running at 3.9% and inflation currently at 2.4%, leaving a real jobs growth of 1.5% which seems “just right” for the bulls. The bears point out that a lot of the new jobs were in the public service, suggesting private sector growth was minimal and that really the jobs trend is down. This is not good news when considering current mortgage problems. Bond traders warn that the tipping point is a sustained ten-year yield over 5.25%. At that level bonds become more attractive than equities, they say.
But the Dow was nevertheless up, and that should lead to an up day on the Australian bourse today. The SPI Overnight closed up 41 points. The less bullish also warned that a lot of the US market’s strength of late is attributable to the energy sector, which is never a good sign overall. Oil leapt up again on Friday to close at US$72.81/bbl for WTI August delivery. Brent surged to above US$75 and Tapis – Australia’s oil – to above US$77. While problems in Nigeria were again cited as the cause, it is clear the market is not as focused as it was on oil a year ago, when WTI hit US$78/bbl. The bulls make the point that when this happened last year, the price then promptly fell US$15 pretty quickly.
But a lot of that fall was to do with a cessation of hostilities between Israel and Lebanon. If anything, at present, the situation is becoming tense once more. And then there’s Iran. Condy Rice reconfirmed in an interview on CNBC on Friday that the Bush Administration would not rule out military intervention.
Looking at the week ahead for the US, Tuesday brings May wholesale inventories and Thursday May trade data and the June budget statement. Friday sees May business inventories, and June retail sales and import prices, along with Michigan U consumer confidence for June and the Empire manufacturing index for July.
The EU current account is released tonight and first quarter GDP on Thursday, while Japan makes its all-important rates decision on Thursday as well. A failure to raise would likely be fuel to the carry trade fire.
In Australia we start with the ANZ job ads figures today, followed by NAB business confidence and May housing finance numbers tomorrow. Wednesday sees the Melbourne Institute consumer confidence measure for July, while Thursday wraps up with July consumer inflation expectations and the crucial labour force data.
The RBA will be keeping a close watch on the employment/unemployment figures ahead of its August rate decision. The second quarter CPI will also be crucial when it is released later in the month.
