The Monday Report

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By Greg Peel

With Europe remaining off the front page for the moment in terms of "new" headlines, the focus has squarely fallen on the US economy. On Friday it was reported that 243,000 jobs were added in January which proved to be twice the final consensus estimate. The unemployment rate fell to 8.3% from 8.5% when consensus had no change. The number was assisted by a fall in participation in unemployment benefits, which is the devil in the detail, but you couldn't keep the smile off President Obama's face.

The US stock indices subsequently soared – or at least soared in terms of the lower volatility we've more recently become used to – with the Dow marking its first triple-digit move since January 3. The 156 point (1.2%) gain in the Dow allowed the average to easily mark a new 52-week high, and a three and half year high, by surpassing the previous high last April. The Nasdaq ran up 1.6% to notch up an eleven year high, and the S&P chimed in with 1.5%.

The good news is that volume was actually quite reasonable, with gains outpacing falls in stock prices by five to one – implicit of a solid buying bias. What we also need to realise is that the more recent trend of lower volumes may look pitiful compared to heady trading post-GFC, but is not that bad compared to pre-GFC bull market levels.

There was also good news for the US in the form of the January service sector PMI. It jumped to an impressive growth rate of 56.8 from 53.0, also beating estimates. In the wake of a solid round of global manufacturing PMI results earlier last week, the global service sector results were also encouraging. Australia swung back into expansion with 51.9 (49.0), the UK surged along with 56.0 (54.0), and even the eurozone saw an uptick to 48.8 (46.9), if not quite to the expansion level.

China let the side down somewhat by falling to 52.9 from 56.0. However we again need to appreciate the impact of two years a tighter monetary policy and the greater scope Beijing now has to ease again. The HSBC equivalent measure, which has a greater focus on small businesses, was steady for the third month in a row at 52.5. 

The solid results in the US are a bit of a boost given it had appeared earlier last week that the data may have reached a tipping point. One jobs report does not a recovery make, however, although thoughts of the Fed being forced to call in QE3 – expectations were strong earlier in the week – have now waned a tad. Listening to fund managers and commentators on business TV suggests opinion is beginning to shift each way to two polar camps – those saying get on now or you'll miss out and those saying each day up will only exacerbate the inevitable pullback round the corner. We note that the VIX is now down to 17.

All the while, nothing has been resolved in Greece. Aside from the details of haircut deal which are yet to be agreed upon, we have a new issue in the form of required austerity measures. Prime Minister Papademos spent the weekend in discussion with Greek opposition leaders on what cuts need to be made to satisfy the EU/ECB/IMF troika's demands in return for the 2012 bail-out funds. The opposition leaders were resistant, which brings a new element into the countdown to the big debt rollover coming up in March. The chance of a Greek default remains very real.

There was little relative movement in currencies on Friday night given all major centres saw positive data. The US dollar index hardly moved at 78.96 and the Aussie snuck up 0.3% to US$1.0776. The big loser on the night was gold, which fell US$32.40 to US$1726.20/oz on diminished expectations of QE3.

No such impact for base metals nevertheless, which all jumped 2-3%. Oil joined in the act, with Brent jumping US$2.15 to US$114.59/bbl and West Texas US$1.41 to US$97.77/bbl.

There was also solid selling in the US bond market as the counter to rising stocks. Having spent last week at or near all time lows, yields rebounded on Friday with the benchmark ten-year jumping 12 basis points to 1.94%.

The SPI Overnight jumped 56 points or 1.3%.

On Tuesday the RBA has to make a rate decision, and it's not going to be an easy one. No doubt Glenn Stevens would have liked to have seen a resolution in Greece before this week to remove the potential for a downside shock in the near term. Looking at the recent data, including last week's manufacturing and services PMIs, one might say another cut is not urgent. The December quarter inflation rate also came in right smack in the middle of the RBA's comfort zone. But then there's the Fed's move to “ease” further, which has in the past given Stevens a nudge. Or we might simply say that after two consecutive cuts at the last two meetings, maybe February should see a pause for reflection. The jury is out.

The jury is also very much out on what the banks will do. ANZ has led the charge in attempting to disconnect its mortgage rate settings from the RBA's overnight cash rate – a logical move given mortgages require long-dated funding – and instead focus on medium-term offshore funding costs. They are higher rather than lower, so were the RBA to cut tomorrow one might reasonably assume the ANZ would make no move. As to the other banks, it's not clear. As to the politicians' response, that's an easy one.

Today sees the TD Securities monthly inflation gauge for Australia along with the ANZ job ad series. We'll also have December month-of and quarterly retail sales figures. Just how bad was Christmas? Tomorrow brings the rate decision along with the construction sector PMI, and Wednesday should see the Westpac consumer confidence report unless it's postponed due to being a rate decision week, which sometimes happens. NAB will summarise business confidence for the December quarter on Thursday and the RBA will release a Statement on Monetary Policy on Friday.

The ECB and Bank of England will both make rate decisions on Thursday, following on from China's release of monthly inflation data. China's trade balance will be revealed on Friday.

It's a quieter week for US economic data this week. The highlights will be wholesale trade on Thursday followed by the trade balance and Treasury budget on Friday along with the fortnightly consumer sentiment measure. The Treasury will auction three and ten-year notes and thirty-year bonds during the week which might be interesting in the context of Friday night's bounce in yields.

On the local stock front, welcome to the six-monthly result season proper. There are quite a few reports due this week and too many to list, but highlights include Cochlear ((COH)), given the recall, BHP Billiton ((BHP)), Rio Tinto ((RIO)), News Corp ((NWS)), Telstra ((TLS)) and Newcrest ((NCM)). Macquarie ((MQG)) will provide a trading update as will National Bank ((NAB)).  

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

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