Daily Market Reports | Aug 14 2009
By Greg Peel
The Dow closed up 36 points or 0.4% while the S&P rose 0.7% to 1012 and the Nasdaq gained 0.5%.
For a long time, 99% of the market has been speaking of inevitable medium to long term weakness in the US dollar for the simple reason that of all the developed debtor economies, the US is a stand-out given its trillions upon trillions of national debt and an ever growing fiscal deficit. This has led to a fall in the US dollar to around the 78 level on the index – its lowest level since the Lehman collapse. The weak dollar, along with China’s apparent growth surge and a stabilisation of developed economies, has sent commodity prices rocketing.
That argument has come into question in recent weeks however, given the strength of various US economic data and a solid earnings season. Most notable was the drop in US unemployment in July when another increase seemed inevitable. (This has since been put down to the number of Americans abandoning a futile job-seeking process and thus dropping off the books rather than new jobs being created, but never mind.) Wall Street began to think that despite the apparent extent of crisis in the US as a result of the GFC, it might just emerge from the crisis more rapidly than Europe, the UK and Japan. This has fuelled a sudden feeling that perhaps the Fed would be the first among those economies to have to raise interest rates, and thus the US dollar would bounce.
The market was surprised recently when the Bank of England announced it would be increasing its quantitative easing program when economists were expecting the announcement of just the opposite. Meanwhile, on Wednesday the US Fed confirmed that it would be winding up its quantitative easing program in the next couple of months. This was some confirmation that perhaps the US was actually in a much better economic place than its peers.
It seemed like a pretty good argument, but last night that all spun around. The UK may well be a basket case but last night the European Union announced an estimated second quarter GDP contraction of only 0.1%. In the first quarter, EU GDP fell 2.5%. This compares to the recent US estimate of a 1.0% contraction in second quarter GDP following a 5.7% first quarter decline. The US might be recovering quickly, but it seems the EU might be the first amongst major economies to recognise positive GDP growth.
On a global scale, it’s all good news. On a relative scale, the US dollar was dumped 0.6% last night to 78.41 on the index. On good global economic news and a weaker dollar, commodity prices soared.
At the end of the session, aluminium, copper, lead and nickel were up 3-4% while tin and zinc gained 1-2%. This represented a retreat from intraday highs however, because the second part of the “maybe the US isn’t going to be a leader after all” story came when Wall Street opened.
Economists have been expecting that US inventory restocking, after a severe period of destocking, would be a key driver of economic recovery. The stock market is reflecting such a view. But they are still waiting – July business inventories fell 1.1% to mark the eighth consecutive monthly decline of more than 1%. The good news is that business sales increased by 0.9% in the month – the best result since June 2008. However, both numbers were distorted by the “cash for clunkers” auto sale program. Sales of new autos with a guaranteed US$4500 back on your pre-loved bomb were huge in July, forcing the Obama Administration to triple the budget allocation for the program.
The same program was also expected to distort the monthly retail sales figures. Economists had already warned that the 0.8% rise in July retail sales they were expecting would carry a big element of auto sales.
Well they were right about the auto sales – they rose 2.4% in July – but net retail sales actually fell by 0.1%.
The world knows that the biggest influence on global economic growth – much bigger than Chinese infrastructure spending – is the US consumer. Representing 70% of what is still by far the largest economic engine on the planet, the US consumer’s spending intentions are simply vital to a real global recovery. That is why the sceptics scoffed at recent improved US corporate earnings results. They came with reduced revenue results, and that means falling sales.
If the retail sales number wasn’t enough, last night the weekly US new jobless claims number rose by 4,000 when a fall of 9,000 was expected. But most importantly, economists have been watching the four-weekly average trend in new claims. That number has been falling for the last few weeks, and a turnaround in jobless claims is historically proven to be a clear indicator of the end of a recession. But last night that average jumped by 8,500 to 565,000.
Thus on the US economic news, London base metal prices pulled back from their highs before the London bell was rung. Oil trades later into the overnight session, and it managed only a US31c gain to US$70.52/bbl, having peaked at US$72.21/bbl on the EU GDP result.
Gold jumped US$7.80 to US$954.60/oz on the weaker greenback and the Aussie shot up close to a cent to US$0.8422.
The implication that the US economy may not be recovering quite as quickly as the stock market is suggesting meant that the US ten-year bond yield fell 11 basis points to 3.59% last night. Falling sales and rising unemployment imply price and wage deflation, counteracting the monetary inflation risk from US money printing. (And this is exactly what the Fed is happy to assume.) Monetary inflation could nevertheless rear its ugly head very quickly if the US Treasury struggles to find buyers for its debt issues, forcing the Fed to raise its fund rate to attract foreign credit. But last night the final auction in a record week of US$75bn of Treasury auctions – US$15bn of thirty-year bonds – went off smoothly with 48% foreign central bank participation.
All of the US$75bn was put away this week without a hitch. It seems the world is still happily addicted to US debt.
Wall Street nevertheless took all of the news in its stride last night. The Dow was down 56 points immediately after the opening bell following the retail sales release but after a fitful session, it managed to close 0.7% higher in the broad index. The S&P 500 is now at 1012, and technical traders are increasingly more excited about the approach towards 1014 which represents a 38.2% Fibonacci retracement of the bear market beginning in 2007.
On stronger commodity prices (which were actually retreating quickly towards the end of the session), the SPI Overnight rose 43 points or 0.9%.
Earnings watch today includes Leighton Holdings ((LEI)) and Macquarie Infrastructure ((MIG)). Keep an eye out tonight for US June industrial production and CPI.
All company reporting dates and major economic data releases are available in the FNArena calendar.
