Daily Market Reports | Mar 04 2013
By Greg Peel
President Obama will now write US$85bn of forced budget cuts into law, having failed to reach any concessions with the Republican-led Congress. The once much feared sequester is now a reality, but Wall Street doesn’t seem to much care. For all those warning of doom and gloom, there are plenty welcoming a reduction in the rate of America’s ever growing debt.
With the midnight hour approaching Wall Street opened sharply lower on Friday, sending the Dow down 117 points from the bell. No doubt there was an element of squaring ahead of the sequester, but weaker than expected data out of China and from across the pond also provided impetus.
China’s official manufacturing PMI for February came in at 50.1, down from 50.4 in January and indicating the barest of expansion. HSBC’s independent equivalent showed a more significant fall, to 50.4 from 52.3 in January. While there is some fear the Chinese recovery, which began late last year, has now stalled the numbers are distorted by the impact of Chinese New Year – not just from fewer working days but from the typical rush of activity towards New Year and the slow pick-up in the hangover after New Year. We go through this every year, and every year we have to wait another month or two to discern a clear trend.
China’s official service sector PMI came out over the weekend, and it showed a fall to 54.5 from 56.2. The service sector is becoming increasingly more important to China’s economy, and while expansion remains evident the pace of growth in February was as slow of that of September at the trough in China’s slowdown. Again, it is hard to gauge just what impact New Year had on the numbers.
Not so misleading is the eurozone manufacturing PMI, which at 47.9 was unchanged from January. This is actually disappointing because until February the pace of the eurozone’s manufacturing contraction had edged slower and slower, to the point a 50 result seemed only a month or two off. Now the slowing has stopped, and to add more gloom, eurozone unemployment hit a record 11.9% in February.
The worst of the bunch was nevertheless yet to come, and it came with a fall in the UK PMI to 47.9 from 50.5. The UK appears to be suffering a typical Olympic hangover, but this is not in itself enough to explain the ever weaker data. Moody’s is clearly concerned, having last week stripped the UK of an Aaa rating. The Bank of England meets this week, with the new governor involved in his first monetary policy decision. The market is tipping increased QE.
It was left to the US to steady the ship, with a PMI increase to 54.2 from 53.1. This result, and the fact Wall Street is largely Teflon coated these days, ensured an early turnaround on Friday morning and a rally all the way back into the black. The Dow closed 35 points, or 0.3%, higher on the session, while the S&P gained 0.2% to 1518 and the Nasdaq added 0.3%. The Dow fell through 14k on the open, but closed above once more by the close.
We should acknowledge the Australian PMI, which came out on Friday ahead of all the rest. Could Australian manufacturing’s descent into hell be over? A result of 45.6, while still in hefty contraction territory, is a decent improvement on January’s woeful 40.2 and an apparent turnaround in the trend, if not a blip.
The balance of a weaker Europe and strong US sent the US dollar index higher once more on Friday, up 0.3% to 82.28. US dollar strength is slowly having an impact on the Aussie, which has fallen another 0.2% to US$1.0197, albeit still-weakening commodity prices are also providing a read-through. An Aussie below 1.02, rather than above 1.05, provides further encouragement for the RBA to leave rates alone this week.
Commodity prices were indeed weaker on Friday, driven by the stronger dollar and generally weak non-US global PMIs, particularly that of China. Base metals were down 1-2% with the exception of a steady nickel, while gold slipped US$2.30 to US$1575.80/oz. Brent crude fell US59c to US$110.40/bbl, while West Texas fell US$1.03 to US$90.68 to mark its lowest level in 2013. Spot iron ore fell US$1.10 to US$150.60/t.
US bond rates came into focus again last week. There has been much talk of investors shifting money to equities from bonds but while the numbers suggest this has been the case in Australia, in the US it appears equities have to date benefited only from shifts out of “cash on the sidelines”. The US ten-year yield had hovered around 2% for some time in February and it looked like a break-up might be on the cards, but despite confirmation of ongoing Fed purchases, the ten-year has now fallen to 1.85%. US investors are not yet ready to part with their low-risk bond protection.
The SPI Overnight fell 5 points on Friday.
The Australian half-year profit result season is now declared over although there are plenty of small caps reporting in March. The large cap results are now all in bar a few later reporters. Attention this week swings dramatically towards the economy, with the highlight being Wednesday’s December quarter GDP release.
Today sees December quarter data for company profits and inventories, along with monthly building approvals, the ANZ job ads series and the TD Securities inflation gauge. Tuesday brings the December quarter current account and trade data, January retail sales and the February service sector PMI. The RBA will meet on Tuesday and leave its cash rate on hold, with recent rhetoric suggesting any cut in the rate will not occur before mid-year.
Wednesday’s GDP result is expected to show 0.8% quarter on quarter growth, or 3.2% annualised. This is up from September’s 0.6% and 3.0%. Thursday brings the January trade balance and February construction PMI.
It is service sector PMI day across the globe on Tuesday, with Australian numbers complemented by numbers from China (HSBC), the eurozone, UK and US. The US sees factory orders on Wednesday along with the Fed’s anecdotal Beige Book, and the ADP private sector unemployment number for February is released. Thursday it’s chain store sales and the trade balance, and Friday sees the all-important non-farm payrolls.
On Wednesday the eurozone will see a revision to its awful December quarter GDP result, which showed 0.6% contraction. The bad news is economists are expecting no change. On Thursday the Bank of Japan will have a monetary policy meeting, but will make no change – that will come next month under the new governor. The ECB will meet and make no change – Draghi will be pleased with the fall in the euro over the course of the month – and the Bank of England will meet and likely increase QE, as noted above.
Japan will revise its GDP on Friday and China will release its trade balance. On Saturday China will provide a monthly data dump of inflation, industrial production, retail sales and fixed asset investment numbers.
Rudi is in Perth this week and as such will not be making any media appearances.
For further global economic release dates and local company events please refer to the FNArena Calendar.
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