The Monday Report

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By Greg Peel

Where goes January, goes the year, or so the adage suggests. Wall Street saw its worst month since May 2012 in January, which doesn’t augur well. So we’d better all knock on wood, throw some salt over our shoulders and watch out for black cats. Or perhaps note that the adage is not always accurate, particularly in recent years.

The last session of any month often sees square-up selling but Wall Street wrapped up January in a fashion consistent with the recent trend. Emerging market currencies continue to fall and bond rates slide on the back of the capital exit sparked by Fed tapering. Earnings reports continue to flow in but simply are not consistent with inflated expectations implied by price/earnings ratios. Everyone had a good 2013, so why not lock it in?

The Dow fell 149 points or 0.9% on Friday night, and 5.2% for the month, the S&P fell 0.7% to 1782, down 3.6%, and the Nasdaq fell 0.5%, down 1.7%.

It was a particularly bad session for earnings results. Misses were reported by Amazon, which fell 11%, Mattel (12%), Mastercard (5%) and Chevron (Dow) (4%), while Wal-Mart (Dow) posted a profit warning. Wal-Mart has suffered since the government reduced the issue of food stamps.

The major US economic data release of the night saw personal spending rise 0.4% in December, down from November’s 0.6% but above 0.2% expectation. This would be good news for the Christmas month, except that incomes fell 0.2% and hence savings fell to 3.9% from 4.3%. It’s the first time since 2009 savings have fallen below 4%.

Europe has been a bit of a star of late, posting some surprisingly good economic data just about everywhere bar France. Certainly 2013 was the year we quietly started to forget about Europe and its “tail risk” and found other things to worry about instead. In their 2014 previews, many an economist forecast a further fading of the Europe threat in 2014. But for that to be the case, Europe will have to address its deflation problem.

The world was somewhat shocked when the eurozone posted an annual inflation rate of only 0.7% in October. The ECB was also shocked, and cut its cash rate to 0.25% from 0.5%. Markets were expecting another cut to be forthcoming given the ECB hinted it was ready to go down the Fed path of zero rates and even some form of QE if necessary, but solid data releases in the meantime saw that expectation fade.

On Friday, however, the eurozone January inflation rate again showed a fall to 0.7%, down from 0.8% in December. The ECB’s target rate is 2.0%. The last thing Europe needs is deflation, given the mountains of debt its banks and sovereigns are carrying. Inflation might have a dangerous impact on prices and wages, but it does reduce the real value of debt over time. Deflation increases the real value of debt.

The euro thus fell on Friday night allowing the US dollar index to rise by 0.2% to 81.27. The US ten-year bond rate ticked a couple of points down to 2.67% but has been hovering around this level recently without any great surge back into bonds coincident with stock selling. Gold was steady at US$1243.60 while the Aussie rose 0.4% to US$0.8750.

Base metals saw a mixed session, with the biggest moves being a 1.7% fall in aluminium offset by a 1.5% gain for nickel. The weak European data helped Brent crude down US$1.51 to US$106.38/bbl, while West Texas lost US82c to US$97.41/bbl. Having traded over US$5.60/mmbtu last week during yet another cold snap in the US, natural gas was back under US$4.90 on Friday as the latest forecast suggested some respite.

Iron ore will be closed all week at its last trade of US$122.60/t.

Friday on Bridge Street saw a lethargic session in which no one wanted much to play, despite a reasonable Thursday night on Wall Street. Friday night saw the SPI Overnight fall 23 points or 0.5%.

On Sunday, as the floats were being prepared in Haymarket and elsewhere for the New Year’s parade, Beijing released its January manufacturing PMI which saw a fall to 50.5 from 51.0 in December. The fall was not unexpected given last week’s HSBC result, and perhaps some comfort can be taken from the fact the number is still in expansion territory.

China will be closed until Friday but Beijing will release its service sector PMI today. For everyone else it’s manufacturing PMI day, with numbers due today from Australia, the eurozone, UK and US. On Wednesday everyone releases their service sector PMIs, including HSBC’s China number.

It is indeed a big week for both economic data and corporate earnings. The long tail of the US earnings season continues this week while in Australia, things start to hot up on the earnings front.

Aside from the PMIs, the US will see construction spending and vehicle sales tonight, factory orders on Tuesday, the ADP private sector jobs numbers on Wednesday, chain store sales, productivity and the trade balance on Thursday, and the all-important non-farm payrolls data on Friday.

Was December’s paltry 74,000 jobs added just a weather-related blip? Mind you, the weather was not much better in January.

The Bank of England and ECB will hold policy meetings on Thursday. The UK is sitting pretty but Friday’s weak inflation number will have the world focusing on Mario Draghi on the night.

Australia has a very busy week of data in store. We start today with the manufacturing PMI, building approvals, ANZ job ads, TD Securities inflation gauge and the RP Data-Rismark house price index. On Tuesday the RBA meets and will leave its cash rate unchanged.

Wednesday it’s the services PMI while Thursday brings the trade balance, retail sales and the NAB business confidence survey. Friday it’s the construction PMI and the RBA’s quarterly Statement on Monetary Policy.

With the local earnings season in first gear this week, reports are expected from the likes of JB Hi-Fi ((JBH)), Downer EDI ((DOW)), REA Group ((REA)), News Corp ((NWS)) and Tabcorp ((TAH)), among others. Woolworths ((WOW)) will report its quarterly sales results on Thursday.

At this point I would like to remind that Australian listed companies are not obliged to publish a reporting date, nor to stick to a date they may have previously indicated. Stock brokers do their best to produce reporting season calendars, but any three can offer up three different assumed reporting dates for the one company. FNArena produces its own calendar on a best endeavours basis but makes no apology if companies do not report on the suggested date, or jump the gun and report early.

Strap in.

Rudi will appear on Sky Business today at 11.15am, on Wednesday at 5.30pm 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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