The Overnight Report: Looking For Jobs

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By Greg Peel

The Dow closed down 7 points while the S&P was flat at 1744 and the Nasdaq gained 0.2%.

Bridge Street pushed to a new five-year high yesterday as traders took the lead from another solid gain on Wall Street on Friday and a near one percent Monday rise in Japan. The materials and consumer staples sectors led the gains, with consumer discretionary not far behind. Interestingly, the concurrent strength we are seeing in the Aussie dollar should be working against the resource sector, and the expectation of no rate cut from the RBA on Cup Day despite the strong currency should work against consumer spending.

A too-strong currency was the primary drive behind the Japanese government’s significant monetary stimulus plan, given the Japanese economy is highly reliant on exports. Yet yesterday’s trade data out of Japan showed a fifteenth straight month of trade deficit – a run which has not been seen since 1979. As an exporter, Japan should run trade surpluses, but since Fukushima the country has been faced with crippling energy bills and additional coal and gas exports have tipped the trade balance.

The good news is that Japan’s exports to China have begun to recover after the trade ban imposed in the territorial struggle for a rock in the sea. The bad news is the government shutdown has not helped exports to the US. Australia focuses very heavily on China, as it should, but Japan remains a significant trading partner.

In the US, tonight’s delayed release of the September non-farm payrolls data gave cause for Wall Street to take a breather last night. The indices traded in a tight range all day and went nowhere by the bell. Last night’s earning’s releases were mostly positive, although McDonalds (Dow) showed it continues to suffer from declining sales.

The Chicago Fed national activity index, released last night, showed a surprise jump to plus 0.14 from minus 0.43 in September when economists had predicted minus 0.05. But sales of existing homes fell 1.9% to the lowest level in three months. US housing affordability is now at its lowest level in five years, since the government introduced temporary post-GFC tax incentives and the Fed fired up QE.

Earlier in the year Wall Street might have fallen on this weak housing number but not now. The fall in sales is attributed to rising mortgage rates, and therein lies the Cacth-22 of the Fed’s tapering decision. The Fed tested the water mid-year by hinting at tapering, and the US ten-year bond yield responded by rapidly rising from around 1.6% to almost 3.0%. Mortgage rates, which had been at historical lows, followed. In September, the Fed cited this recovery-dampening response as a reason not to taper. The ten-year bond yield has since settled around 2.6%.

The Fed wants to taper QE if the US economy is recovering sufficiently, lest it spark an inflation surge. If the Fed starts tapering, it risks killing off the recovery. What to do? The government shutdown has now provided the excuse to continue QE at least into next year, but eventually the same issue will arise. That’s why some suggest “QE infinity”. There just seems to be no way out.

Which is not good news for the Australian economy. Last night the Aussie eased back a little, to US$0.9658, but that’s a lot higher than the sub-90 levels seen when tapering was assumed. Some are now suggesting the US shutdown/debt ceiling fiasco has done irreparable damage to the greenback, and any recovery is thus uncertain.

The US dollar index was flat at 79.68 last night. Gold is unchanged at US$1316.50/oz. Base metals had fallen a little late last week so last night they rose a little, with the exception of nickel which marked another 1.6% gain. Brent crude fell US16c to US$109.92/bbl. West Texas crude fell US$1.75 to US$99.06/bbl, but was impacted by tonight’s contract expiry.

Spot iron ore was again steady at US$134.40/t.

Undeterred, the SPI Overnight closed up 10 points or 0.2%.

Depending on the source, expectations tonight are for 179,000-185,000 jobs to have been added in the US in September. Tomorrow we’ll know. Today sees data on Chinese property prices.

On the local stock front, today we’ll see quarterly production reports from BHP Billiton ((BHP)), Mincor ((MCR)) and Oil Search ((OSH)) and quarterly updates from Dexus ((DXS)) and Mirvac ((MGR)).
 

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