The Monday Report

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

By Greg Peel

After the dust had settled on the excitement of QE2 and a Republican Congressional victory last week, Friday night's trade on Wall Street was all about adjusting to the new age of a Fed-backed stock market. Poor economic data don't matter, because the Fed will step up QE2 if necessary, and if the data are good and the QE2 total ends up being less than assumed, well that just means the US economy's performing better than expected.

After the big run on Thursday night it was never going to be a surprise if Wall Street took a breather on Friday night. It was only right at the death that the Dow kicked into positive territory to close up 9 points. The S&P was a bit more definitive with a 0.4% gain to 1225, leaving the previous April high of 1217 behind. Financial stocks have a strong weighting in the S&P and the steeper QE2-driven US yield-curve is good news for banks which borrow short and lend long.

It was nevertheless jobs night, and the addition of 151,000 new jobs in October comfortably exceeded expectations of around 80,000. It was a further positive that the private sector alone added 159,000 jobs. We are now clear of the census worker distortions that have been the feature of US jobs results for most of the year.

It was one of the best monthly jobs results in a while, but one has to remember there is a population growth factor to consider. There is also the drag effect that if conditions improve, a number of workers who had given up will re-register as unemployed and start actively seeking work again. As it was, the US unemployment rate remained stuck on 9.6%. This failure to move the needle took a bit of gloss off the raw numbers.

The September pending home sales number was also a disappointment with a drop of 1.8%. August pendings had risen 4.4% and economists had again expected a positive number. The fall is being blamed on the current mortgage foreclosure mess, in which new buyers of foreclosed property may find that foreclosure overturned as invalid and the property returned to the previous owner. But September's number was nevertheless down 25% on September '09, and 32% down from the April expiry of Obama's extended home buyer tax credit. Stand by for some renewed fiscal stimulus to accompany the Fed's monetary stimulus. Money is no problem – the printing presses will look after that.

So Friday's numbers were somewhat mixed providing little reason to buy, but there's no point in selling into QE2 support.

The steady stock market belied what was quite a big bounce in the US dollar on Friday night. Following Thursday's 0.5% fall, the US dollar jumped back 1.0% which would normally mean a weak stock market.

The bounce can likely be attributed to some short-covering on the supposedly good jobs number, but there was also the effect of a weaker euro on the day. Germany's September industrial orders showed a surprise 4% fall, while Irish sovereign debt spreads blew out yet again. Economists are now concerned that the very strict austerity measures being imposed in Ireland in order to cut the budget will also kill economic growth, thus putting the budget under pressure from the other side of the ledger.

The euro-centric nature of the US dollar bounce was further evidenced by a slight rise in gold – up US$2.40 to US$1394.30/oz – which is unusual in the face of such a big dollar move, and a stable Aussie, which finished Friday down only slightly at US$1.0155.

Commodities were also relatively steady on Friday night. Oil rose US36c to US$86.85/bbl while base metals were mixed on small moves in London.

The SPI Overnight took it's cue from the S&P in rising 4% or 18 points.

It's a relatively quiet weak for US economic data this week. Wholesale inventories are released on Tuesday and the monthly trade balance and Treasury budget on Wednesday. Thursday is the Veteran's Day holiday which sees banks and the bond market closed and stocks and futures open. Friday wraps up with the first U-Mich consumer sentiment survey for November.

Of more interest will be this week's auction of US$72bn of three and ten-year Treasury notes and thirty-year bonds. Not only is the Fed now a substantial buyer of bonds, the volume on offer is falling each month. The ten-year yield seems pretty much stuck around the 2.5% mark at present, and the question is whether it can really go much lower. More demand for stocks now?

It's a monthly data week for China this week with the trade balance and property prices out on Wednesday and inflation, investment and retail sales numbers along with industrial production out on Thursday. How the numbers flow will determine whether or not Beijing again raises rates before year-end.

In Australia it's a week for bank economists to earn their keep. Today sees the ANZ job ads report, Tuesday the NAB business conditions and confidence survey and Wednesday the Westpac consumer confidence survey. Wednesday also brings housing and investment finance numbers, and on Thursday it's our turn to learn the unemployment rate. Economists are expecting a tick down from 5.1% to 5.0%.

After a bit of a pit stop last week the AGM juggernaut fires up again this week in Australia and will really be hitting its straps over the next three weeks. Dulux ((DLX)) and Orica ((ORI)) report full-year results today, SPN Ausnet ((SPN)) provides its interim on Wednesday and Optus owner SingTel ((SGT)) releases its quarterly on Thursday.

Please note that the US reverted back to standard time over the weekend, meaning the NYSE will now close at 8am Sydney time through to March rather than 7am as has been the case since Australia switched to summer time a month ago. 

For further global economic release dates and local company events please refer to the FNArena Calendar.

Click to view our Glossary of Financial Terms