The Overnight Report: Manufacturing Turns The World

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 By Greg Peel

The Dow rose 143 points or 1.3% while the S&P rose 1.3% to 1202 and the Nasdaq added 1.5%.

These hundred plus Dow point moves in opposite directions are becoming rather common. It just goes to show markets are all rather anxious at the moment, panicking either positively or negatively with each new piece of news. Volumes on the NYSE have been fairly solid this last week or so (last night 1.1bn) which is not unusual at inflexion points. The VIX, however, dropped back to 20 again last night as the S&P 500 reclaimed 1200 – again.

It has been a story of manufacturing since markets wrapped up on Friday night. Another tick up in the Chinese PMI (purchasing managers' index) on Sunday led to another tightening of bank capital ratios, while yesterday an enormous jump in the Australian AiG equivalent, from 50.5 in February to 59.3 in March, was instrumental in turning the ASX 200 around from its Wall Street/mining tax depths. At the end of the session, only the tax-related falls in BHP Billiton ((BHP)) and Rio Tinto ((RIO)) made any impact with the bulk of the index square on the day.

The local result belies the two-speed economy argument for the time being, and is quite a surprise. Not that Australia's manufacturing industry is any substantial contributor to GDP these days. Mining tax critics will have some grist for the mill. In the meantime, a 20% jump in house prices (annualised) makes China's property bubble look ho hum. Or is Chinese buying the culprit in Australia as well?

Either way, these Australian numbers, along with the TD Securities monthly inflation gauge which yesterday showed a 0.4 percentage point increase to 2.9% annualised, will make it even harder for the RBA to stay put this afternoon.

The eurozone also released its PMI manufacturing index last night, which increased from 56.6 to 57.6, but the biggie was the US ISM equivalent which rose from 59.6 to 60.4. To put all these numbers into perspective, the Australian index is at its highest level since May 2002, the US index since June 2004, and the European index, despite all the goings on, the highest since June 2000.

Clearly global economic recovery is underway in the manufacturing sector. But is it all just inventory restocking post-GFC? Could these numbers all fade away again when inventories are comfortably restocked? Well not if the US consumer has a say in it.

The monthly personal income and spending data were released in the US last night. Spending rose for the sixth straight month in March, up 0.6% after having been up 0.5% in February. Income was up 0.3% from 0.1% prior. The savings rate fell for the third straight month, down to 2.7% from 3.0% in February. The numbers were largely in line with expectation.

Wall Street is ecstatic that Americans are spending again. At around 75% of GDP, the US economy runs on the consumer. Spending is needed to aid economic recovery, particularly at a time when unemployment remains high. But just don't mention the twin deficits. Commentators are unconcerned about the fall in savings so quickly after the GFC, suggesting once the US economic recovery matures then savings numbers will rise again.

Yeah right. When has that ever happened? It's an interesting juxtaposition between the tiny economy of Greece and the huge US economy. Deficit problems have Greeks rising in the streets over pay-cuts while Americans hail increased spending despite deficit problems. There will be no EU-IMF to bail out the US when the time comes – only China.

US construction also rose in March – by 0.2% when consensus was for a drop. That's the first rise since October. All these figures conspired to send Wall Street back from whence it came in Friday's session, along with some soothing words from Warren Buffet and the supposed resolution of the Greek issue.

Buffet came out in defence of Goldman Sachs last night, despite long having been an entrenched critic of investment bank practices. He suggested Goldman had done nothing wrong. Nor had ratings agencies such as Moody's done anything wrong in their fierce downgrading of investment banks (2008) and sovereign debt (now), said Buffet. Wall Street took heart at the great man's wisdom, sending Goldman shares up 3%.

Just don't mention that Buffet bought a sizable chunk of Goldmans in 2008, and is also an investor in Moody's – a parcel which he has been quietly offloading in recent times.

Wall Street had its first chance to respond to the confirmed 110bn euro rescue package for Greece last night, and took it as a positive relief. But across the Atlantic there was not a lot of relief evident. Having bounced hard initially on Friday night, the euro plunged again last night to be back at its 12-month low. The two questions which remain are (a) is the bail-out package enough to stop contagion in the eurozone, and (b) will Greece be able to stick to the requisite austerity package?

The response from the Portugese bond spread, for example, was to tick down only slightly last night – not the stuff of blessed relief. Meanwhile rioting in the streets of Athens has stepped up a gear.

The euro fall sent the US dollar index up 0.5% to 82.36, but gold kept rising, up another US$3.00 to US$1182.30/oz. London was closed for the Labour Day holiday so we have no base metals response today.

Oil is another case in point. Nymex traders are unsure as yet whether Gulf production will be interrupted beyond this one damaged well, although already a couple of gas rigs have shut down as the spill drifts their way. The Gulf represents 25% of US oil production. So while the front month rose only US79c to US$86.19/bbl last night, buyers have raided the latter months to send the oil market into a steep contango.

And while Wall Street revels in solid March economic data, the spill itself quietly grows to threaten the worst environmental disaster in history, not to mention the potential long-lasting impact on related industries such as fishing. (Start buying Australian prawns and freezing them).

The Aussie did not fall on the US dollar rise last night, preferring to add a quarter of a percent over 24 hours to US$0.9265 based on yesterday's hawkish Australian data.

The SPI Overnight rose 20 points or 0.4% to also imply a return to Friday's level, if accurate.

Westfield ((WDC)) posts its first quarter result today, while the RBA's rate decision at 2.30pm will be unsurprising which ever way it goes.

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