The Monday Report

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By Greg Peel

With Wall Street already in rally mode, solid US jobs numbers and acceleration in manufacturing sector growth conspired to provide for another very positive session on Friday night. A 149 point gain, or 1.1%, took the Dow over 14,000 for the first time in five years, closing nine points above the mark. The next target is the October 2007 all-time high of 14,164. The S&P rose 1% to 1513, still 52 points shy of its equivalent high, while the Nasdaq added 1.2%.

Friday’s non-farm payrolls data showed the addition of 157,000 new jobs in the US in January. The result fell shy of consensus expectations of 170,000, however revisions to previous months provided the excitement on the Street. This is the nature of the non-farm payrolls (and most other US) data that revisions can be substantial even months later. Many thus dismiss immediate results as providing for potentially misplaced volatility, but Wall Street was happy to accept Friday’s announced revisions that delivered big increases in the numbers for the December quarter.

The end result is that 335,000 more jobs were added in 2012 than previously reported, or an increase in monthly average new jobs to 181,000 from 153,000. The only bad news is that the unemployment rate ticked up to 7.9% in January from 7.8%, albeit this suggests more people attempted to find work which in itself suggests more confidence. It will be a drawn out battle between jobs added and the participation rate as Wall Street looks to the Fed’s 6.5% target for QE exit.

Expansion in the US manufacturing sector accelerated in January according to the manufacturing PMI, which increased to 53.1 from 50.7 in December. China’s equivalent number had earlier shown a decrease to 50.4 from 50.6, but still in slight expansion nevertheless. The non-official HSBC measure rose to 52.3 from 51.5. The UK was disappointed with a slip to 50.8 from 51.2, but the somewhat amazing news was the suggestion that contraction in the eurozone manufacturing sector has now all but run its course. At 49.8, up from 46.0, the eurozone PMI is almost stable. This figure has been quietly improving for the past several months.

Then there’s Australia. At 40.2, down from 44.3, Australia’s manufacturing sector is contracting at break-neck speed. Can the RBA save this labour-intensive sector with further rate cuts, tomorrow or at least soon? Not if the Aussie remains stubbornly over parity, and the Aussie has proven that it will not fall on rate cuts alone given the still substantial interest rate gap to the rest of the developed world, and ongoing spending on major resource sector projects from offshore.

The Aussie has fallen 0.3% since Friday morning to 1.0407, with the weak manufacturing data a supposed incentive for an RBA cut, not to mention a slight fall in the Chinese result. The US dollar index remains steady at 79.17, while gold decided to have a positive session and rise US$6.50 to US$1667.30/oz despite the positive US data.

The data also provided a fillip for base metals in London, which all rose over 1%, while iron ore gained US70c to US$153.20/t. Brent crude jumped a solid US$1.16 to US$116.17/bbl and because the world is still erroneously fixated on West Texas as the global oil “benchmark”, the rising true cost of energy is going largely unnoticed by the punters. West Texas rose only US12c to US$97.61/bbl on Friday.

The US ten-year bond rate is now sitting at just above 2%, and an interesting statistic is that January represented the first full month since 2007 that more money has flowed into US equity funds than bond funds. The stat is clearly supported by the stock market rally, but in terms of tapping into the famed “cash on the sidelines”, we have only just begun. Some will warn that the VIX volatility index, which fell to below 13 on Friday, is sending alarm bells of over-cooked complacency. We will undoubtedly see a pullback in stocks sometime soon, but in bull markets the VIX can remain in the teens for very long periods.

The SPI Overnight closed up 24 points, or 0.5%.

Yesterday Beijing released its official service sector PMI for January, which ticked up to 56.2 from 56.1 to underscore healthy expansion in this sector. The rest of the world will release its equivalent measures tomorrow, and HSBC will release its own calculation.

The US will see factory orders data tonight, the services PMI on Tuesday and chain store sales and consumer credit on Thursday. Friday will wrap up with the monthly trade data.

China will release its monthly trade balance on Friday as well, albeit for January rather than December, and will also provide January inflation data.

The ECB and Bank of England will both hold monetary policy meetings on Thursday.

Australia will see the ANZ job ads series today along with building approvals, followed by the trade balance, quarterly house prices and the services PMI tomorrow. Tomorrow also brings the RBA rate decision and one can only suggest the lead-in data to this month’s board meeting have been mixed. Can the RBA cut while the stock market is surging? We’ll have to wait and see.

We’ll also have to wait till Wednesday to see the retail sales data for the most important month of the retailing year – December – and then the January unemployment numbers come out on Thursday.

This week the Australian six-monthly corporate reporting season begins in earnest. We’ll start slowly and accelerate as the month progresses, reaching fever pitch in the last two weeks of February. The bulk of the larger cap stocks report this month, while the first weeks of March will see ongoing announcements from smaller ASX listings.

Highlights this week include Cochlear ((COH)) and Transurban ((TCL)) tomorrow, News Corp ((NWS)), Tabcorp ((TAH)) and Telstra ((TLS)) on Thursday and Newcrest ((NCM)) on Friday. Macquarie Group ((MQG)) will provide an operational update tomorrow and Westpac ((WBC)) will provide its quarterly results. National Bank ((NAB)) will follow suit on Thursday.

Rudi will appear on Sky Business today at 11.15am and on Thursday at noon.

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

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