The Overnight Report: Tapering? Not Anytime Soon

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By Greg Peel

The Dow closed up 75 points or 0.5% while the S&P gained 0.6% to 1754 despite the Nasdaq only rising 0.2%.

The delayed September US non-farm payrolls report, released last night, showed 148,000 jobs added when around 180,000 were expected. The unemployment rate fell to a five-year low of 7.2% and for once the participation rate remained steady month on month at 63.2%. However August’s rate represented a 35-year low.

For the nine months to September, an average of 177,000 jobs were added. But the average for the September quarter fell to 143,000. This is not the trend the Fed wants to see. And with the US government shut down over the first two weeks of October, it is unclear at this stage just what the flow-on to the jobs market there may have been, notwithstanding the general impact on US GDP.

The result is that post shutdown expectations March might be the first opportunity for the Fed to start tapering are now being pushed out to June. Others are suggesting no tapering at all, but rather an increase in QE.

To what end? QE1 staved off a US depression and QE2 was necessary to counter the threat from Europe. QE3, on the other hand, appears to have achieved little. The Fed is throwing money at the US economy but it is getting no further than the big banks, the large corporations and speculative fund managers and traders exploiting the zero interest carry trade. The money is not filtering down to the US economic heartland; to the small and medium enterprises which collectively make up a jobs growth engine.

In the meantime, renewed weakness in the US dollar is impacting on the capacity for other economies to recover as local currencies renew their upswings. These include Europe, Japan and, of course, Australia. Last night the US dollar index fell 0.5% to 79.26 on expectations of stronger for longer QE. The Aussie gained yet another 0.5% to US$0.9710.

The rebound in the Aussie is having no impact on Bridge Street. Yesterday’s 21 point gain in the ASX 200 may be relatively modest but as we push further beyond five-year highs, one wonders when the currency drag re-establishes. If the Fed is not going to taper before at least June, and China’s not going to fall in a heap, parity and beyond is a lot more likely scenario than a fall back to sub-90 in the foreseeable future. China will have to do really well.

Earnings reports continue to flow in the US and the score card to date is one of modest earnings growth and some signs of a rebound in revenues. But again, this is the September quarter and no one is yet sure just how badly confidence was dented in October, leading to a weak December quarter. The mantra nevertheless remains one of “where else do you put your money”. Last night it was in US bonds, as the ten-year yield crunched down 10 basis points to 2.51%. And it was in gold, with the inflationary potential of “QE infinity” pushing the precious metal up US$25.70 to US$1342.20/oz.

And one has little choice but to buy stocks, it appears. PE ratios are strong but not yet into overbought territory, and there remains trillions still sitting in cash. Last night the Dow shot up 126 points on the jobs release before easing to the close, while the Nasdaq was impacted when the CEO of recent superstar Netflix revealed his concern over a rocketing share price. Netflix shares fell 9% and took the tech sector down with them, yet still the broad market S&P 500 was able to post the biggest gain among the indices, into further blue sky.

In other US economic news, the delayed release of construction spending in August showed a 0.6% increase to the highest level since April 2009. The Richmond Fed manufacturing index, released on schedule, rose to plus one for the month from zero last month when another zero was forecast. Not all US data are on the wane, but the number that really matters is jobs.

Base metals prices rose in London last night, but mostly on the mathematical impact of the weaker greenback. Lead missed out but the others all rose 1%, except for recent star nickel, which gained another 2.5%.

The oil market was disparate last night, with geopolitical tensions back on the agenda, this time between friends. In the US, the West Texas contract has rolled to a December delivery front month at a time when the US is bursting at the seams with crude. Meanwhile, the Saudis are apparently upset with the US for wimping out on Syria, and Riyadh is threatening a “major shift” in its dealings with the US. Whatever that means. But if it means less Saudi oil heading America’s way and more of it going to, say, China, it seems a rather limp threat given North America is rapidly becoming energy self-sufficient.

The upshot is that Brent rose slightly to US$110.00/bbl while West Texas fell US$1.43 to US$98.25/bbl.

Spot iron ore fell US$1.10 to US$133.30/t.

The SPI Overnight rose 31 points or 0.5%.

Australia’s September quarter CPI result will be released today but it is not expected to suddenly spark a Cup Day rate cut. AGL Energy ((AGK)) and Origin Energy ((ORG)) are among the many companies holding AGMs today.

Rudi will appear on Sky Business today at 5pm.
 

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