The Monday Report

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By Greg Peel

Hello and Happy New Year. FNArena is back for another fun-filled twelve months of financial market hijinks. I hope everyone had an enjoyable break.

We left 2013 with the tapering debate finally being put to bed, or at least put to bed in terms of Step One. The Fed has reduced its monthly bond purchases to US$75bn from US$85bn. Of course we can now spend all year tediously debating the timing of the next reduction, and whether that may occur at all this year. We left 2013 with the US labour market looking apparently quite healthy in terms of jobs growth, and we began 2014 with new girl Janet Yellen formally warming the Fed chair. But then along came Friday’s December jobs report.

Before we jump back in, let’s have a look at what’s happened to the major stock markets during the break from December 20.

The Dow closed on Friday, December 20 at 16,221 and last Friday at 16,437, up 1.3%. The S&P has risen from 1818 to 1842, up 1.3%. The Nasdaq is up 1.7%. The FTSE is up 2.0%, the DAX 0.8% and the Nikkei 0.3%. The Shanghai Composite is down 3.5%.

The ASX 200 is up 0.9%.

On Friday night in the US it was reported only 74,000 jobs were added in December when economists had expected 193,000. Their expectation was consistent with the trend towards the end of 2013 of adding around 200,000 new jobs per month. The December result represents the lowest monthly growth in three years. What went wrong? Will the Fed now be seen to have made an egregious error?

Well for starters, some have pointed to particularly cold weather in the US in December (it appears to have only become colder in January) as discouraging Americans from going out to look for a job. The unemployment rate plunged to 6.7% from 7.0% which should be heartening, except that yet another fall in the participation rate was the cause. The 6.7% result at this stage could mean we hit the 6.5% level as early as this month, which once upon a time was Ben Bernanke’s target level to trigger the first rise in the Fed interest rate. Bernanke did, nevertheless, temper that intention as 2013 wore on, suggesting it was not set in concrete, and pointing to a weak participation rate as being reason not to stick blindly to the target. There has since been talk of lowering that target and besides, we have only had one taper increment so far, and it seems incongruous to not first wind down the QE before any rate rise is on the cards.

On the strength of December’s actual jobs-added number, there’ll be no second increment anytime soon. And it is notable that Wall Street pretty much took this result in its stride. The Dow was down 65 points following the result release on Friday, but recovered to be only down 7 points. The S&P finished up 0.2% at 1842 and the Nasdaq added 0.4%. Does this mean we’re back to bad news is good news?

Given the way Wall Street rallied on taper night last month, it’s unlikely. More likely is simple disbelief in the 74,000 figure, with many noting straight away that the non-farm payrolls number is revised twice subsequently, and often substantially. Sceptics suggest the December number might look a bit different at the January and February releases.

Anyway, we’re no doubt in for another year of endless discussion over US jobs, further tapering and the US economic recovery in general. We note also that December has data suggested the Chinese economy slowed its pace of growth in the month. In Australia it will be all about the Aussie, the transition away from the mining economy and whether or not the RBA will move up, down or sideways in the months ahead.

If US stock markets shrugged off the jobs number on Friday, the response was not so indifferent in other markets. The US dollar index dropped 0.4% to 80.63, gold jumped US$20.90 to US$1248.60/oz and the US ten-year bond yield plunged 10 basis points to 2.86%. The Aussie jumped a cent to US$0.8995.

Such movements reek of a suggestion tapering was premature, and if so the next increment won’t be considered anytime soon. Similar responses we’re seen in commodities markets, in which extended US dollar printing implies support for US dollar-denominated prices. Hence despite the economic implications of a weak US jobs number, base metals all shot up a percent or more, with tin up 2% and nickel up 3%, while Brent crude rose US74c to US$107.25/bbl and West Texas jumped US$1.23 to US$92.89/bbl.

Spot iron ore, on the other hand, fell US30c to US$130.70/t on Friday.

The SPI Overnight fell 4 points.

Australia’s jobs numbers will be in the frame this week, on Thursday, preceded by ANZ jobs ads, housing finance and investment lending today, and vehicle sales tomorrow.

It’s a busy data week in the US, including business inventories and retail sales on Tuesday, the PPI, Fed Beige Book and Empire State manufacturing index on Wednesday, the CPI, housing market sentiment and the Philly Fed manufacturing index on Thursday, and housing starts, industrial production, and the first fortnightly Michigan Uni consumer sentiment measure for the year on Friday.

Japanese markets are closed today.

On the local stock front, quarterly production report releases for the resources sector begin to ramp up this week. Thursday sees reports due from (but potentially subject to change) Carnarvon ((CVN)), Iluka ((ILU)), Paladin ((PDN)), Rio Tinto ((RIO)), Santos ((STO)), Woodside ((WPL)) and Yancoal ((YAL)). Friday it’s AlacerGold ((AQG)), Grange ((GRR)) and Regis ((RRL)).

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

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