FYI | Dec 06 2007
By Greg Peel
Wall Street has been holding its breath all week as it awaits the release of the official November jobs data on Friday. Economists are expecting the non-farm payrolls figure – which excludes farming but includes both private and public sector positions – to be up by only a statistically low 60,000. The Fed has indicated that it, too, will be paying close attention ahead of its rate decision next week.
Last night private employer group ADP released its own November jobs survey, which measures job increases in the private sector alone. The number came out at 189,000, and that set a fire under Wall Street. Throw in Wall Street’s estimated further 25,000 public sector jobs and you have a non-farm figure of 214,000 against the economists’ consensus of 60,000.
The market has interpreted the number to be good enough to be a positive indicator on the US economy, but not enough to prevent at least a 25 point rate cut from the Fed. End result – the perfect solution. The Dow closed up 196 points or 1.5% and the S&P also added 1.5%. Technology returned to favour and the Nasdaq added 1.8%.
While clearly igniting the stock market, the ADP figure was met with a few raised eyebrows. Just how wrong can the economists be? Fans of the ADP number as an indicator suggest economists have become way too bearish. More bipartisan opinions have been voiced that (a) jobs numbers tend to lag by about two quarters, and Q2 and Q3 in the US still showed strong economic growth, and (b) there is a reluctance from any employer to let staff go just before Christmas, so watch out for the numbers early in 2008. It may thus still eventuate that Friday’s numbers are equivalently strong.
Which begs the question, if Friday’s numbers are equivalently strong will the market rally again?
Another unexpectedly bright number was released last night, being October factory orders. It was up 0.5% when economists expected a flat result, however the increase was largely attributed to the increased cost of oil flowing through to petroleum products and chemicals in dollar terms. The ISM non-manufacturing index came out slightly weaker than expected however, falling to 54.1 in November from 55.8 in October.
Further impetus was provided as more details were released about the Bush Administration’s plans to freeze reset mortgage rates for those homeowners (and only those homeowners) who will be unable to afford them. The plan intends a freeze on the rate resets of five years. While still somewhat sceptical of how this can possibly be achieved considering it is uncertain who actually owns the mortgages, the market nevertheless appreciates that such a move could only be attempted in tandem with a Fed easing of monetary policy.
Dow component and mortgage insurer AIG added a further positive when it reassured the market that its exposure to subprime mortgages was “manageable”. The stock added about 5%.
But having already pushed into the plus 200s around 2.30pm, the Dow got the wobbles and almost halved those gains when Moody’s announced it believed large bond insurer MBIA may yet see a capital shortfall on its insurance obligations. This set all bond insurers tumbling, and temporarily took the gloss off the rally.
However the reversal of sentiment didn’t last long and investors soon started piling back in, keen to snap up financials, techs and emerging market stocks in particular. Computer chip stocks, which have been under pressure lately from talk of US companies putting off their IT upgrades, received a big boost when one analyst declared opportunities for computer growth in emerging markets to far outweigh any weakness in the domestic market and thus upgraded Dow component Intel to Overweight. The stock jumped more than 3%.
Traders still have three and a half more sessions to speculate about what the Fed might do, with expectation now settling back towards a 25 point cut once more. This will not be disappointing as long as the Fed hints in its accompanying statement that the door is still open, traders suggest. Another distinct possibility is 25 plus a 50 point cut in the discount rate, which might be the “just right” solution.
The US dollar rose sharply on the back of the supposedly strong economic news, posting gains against all currencies. The move came ahead of rate decision by both the UK and EU tonight, but pressure is now on the Bank of England to finally cut given some weak economic data this week. If so, a stronger dollar against the pound would be vindicated. If the ECB doesn’t cut, it won’t mean the pressure isn’t building. The Aussie slipped slightly to be US$0.8749.
Gold responded as it should to a stronger dollar, falling US$7.50 to US$794.40/oz. Gold was not helped by another fall in the price of oil.
The OPEC production meeting which everyone has been waiting for concluded the best thing to do would be to leave production where it is and have another meeting in February. Thanks – you’ve been a great audience. Don’t forget to try the fish.
On planet earth the latest weekly inventory data – another source of constant amusement – showed crude inventories fell in general but rose at the Cushing delivery point, while product inventories (petrol, heating oil etc) rose. Add this together and it means let’s go down, although it is pretty clear now oil wants to get into the low 80s anyway. Oil fell US83c to US$87.49/bbl.
What was a base metal trader to do? The session started weaker in London once more, following on from the recent trend. However the strong US jobs number sparked some covering but any thought of a big reversal on a change of heart economically was dampened by the jump in the US dollar and its effect on base metal prices. At the end of the day, metals closed largely unchanged.
The SPI Overnight was up 83 points.
