The Overnight Report: Maybe It’s Not The Snow

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By Greg Peel

The Dow closed up 18 points or 0.1% while the S&P was flat at 1845 and the Nasdaq added 0.1%.

There was disappointment on the local economic data front yesterday with the release of the numbers for December quarter construction work done. Construction volumes fell by 1.0%, having risen 3.0% in the September quarter. Engineering construction fell 0.5% and building (residential and non-residential) fell 1.6%.

The numbers indicate to economists at CBA that the engineering downturn is yet to materialise meaningfully but we are also yet to see any lift in non-mining construction – that which is meant to fill the void. The slow downturn is not a surprise given that while construction related to projects in mining per se has all but dried up, ongoing construction related to major LNG projects in Queensland and WA continues, and will continue for a couple of years yet.

The real disappointment lies in a lack of any apparent rebound in residential construction. Not only has talk of a “housing recovery” buoyed related sectors and driven house prices upward, but the numbers are at odds with data suggesting a 20% increase in building approvals over the last twelve months. CBA suggests that because the bulk of these approvals are for apartment blocks rather than single houses, and the lag between approval and construction for apartments is longer than for houses, a rebound will likely become apparent in subsequent quarters.

Meanwhile, CBA estimates the weak construction data shave 0.75 percentage points off the December quarter GDP. The Aussie has responded to the data by falling half a cent to US$0.8965.

On the subject of economic data, a funny thing happened on Wall Street last night.

Last week traders were shocked to see a 5% fall in existing home sales in January but of course this was quickly blamed on the weather. Indeed, all weak housing data of the last couple of months have been blamed on snow. But last night January new home sales data was released and showed an increase of 9.6% — the fastest pace in five years.

Is that buyers of newly built homes are far more intrepid than buyers of previously owned homes? Are they content to break out the shovel, dig out the car, whack on the snow chains and take their lives into their hands on the icy roads in order to secure a dwelling no one else has occupied, while those looking for pre-loved models look out the window in the morning and go straight back to bed? Or are all these new homes in the desert?

Or is the Weather Put just a furphy?

Now everyone’s really confused. And there will be no clarity for at least a couple of months when the snow finally melts. Meanwhile, the US dollar index jumped 0.3% on the data to 80.40 which put the frighteners through the stalled gold market, with gold falling US$13.40 to US$1329.50/oz.

US bond yields, on the other hand, fell again. The ten-year dropped another 3 basis points to 2.67%. If the US economy really is improving, weather notwithstanding, and the Fed is intent on maintaining its tapering schedule then by rights US bond yield should rise. At lot of traders are nevertheless pointing towards the Ukraine, which aside from asking for US$39bn from the IMF in the wake of its collapsed government, is in the process of driving a rift between Russia and Europe.

The US stock market shot up on the new homes data, peaking up 80 Dow points and taking the S&P 500 to a new intra-day high of 1852. But again the rally failed, and again the S&P closed below the 1848 previous closing high. The more fails, the more likely the index is to turn tail and head south for a while.

Base metals were again mixed on smallish moves last night but iron ore suffered another sharp blow, falling US$1.30 to US$117.80/t which will again evoke weakness in the big miners on Bridge Street today. Gold stocks won’t look too flash either.

Weekly US crude inventories were seen to rise less than expected last week so West Texas rose US76c to US$102.54/bbl while Brent drifted US13c to US$109.37/bbl.

Aforementioned likely weakness in local commodity stocks today sees the SPI Overnight down 15 points or 0.3%.

Today brings Australia’s December quarter capital expenditure data which is more fodder for GDP adjustments and currency moves while all eyes will be on Qantas ((QAN)) in today’s round of local earnings releases.

Tonight Fed chair Janet Yellen will provide her testimony to the Senate Banking Committee following last week’s postponement due to snow.

Rudi will appear on Sky Business at noon. Tomorrow he will participate on Your Money, Your Call – bonds versus equities, Sky Business, 7-8pm.
 

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