The Monday Report (On Tuesday)

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By Greg Peel

The US added 217,000 jobs in May, just beating expectations of 210,000. The unemployment rate remained steady at 6.3% as the participation rate ticked up from April. May represents the fourth consecutive month of 200,000 plus jobs being added and the 8.7m jobs created since the end of what America calls the Great Recession is equivalent to the total lost in the GFC.

It has taken six years for the US labour market to recover – the longest period following any recession since the Great Depression.

Wall Street liked the result, and many saw it as further confirmation of an economy back in solid recovery mode following the brief weather setback of the first quarter. The Dow rallied 88 points on the news or 0.5% and the S&P gained 0.5% to 1949, with both continuing to rise into blue sky. The Nasdaq added 0.6%.

The US bond market remained unconvinced, with the ten-year yield rising only one basis point to 2.60%. However it is difficult for US yields to rise in the wake of Thursday night’s ECB rate cut/stimulus package given European yields have all fallen as a result. The spread between US tens and German tens is close to an all-time high, with the bund trading around 1.4%. The Spanish yield is now lower than the US yield, implying Spain can borrow money more cheaply than the US.

Such is the make-believe world the central banks have created for us since 2008.

Gold remained steady following the jobs report, as did the Aussie. Base metals are mostly playing a micro game at present related to inventories and the Chinese clampdown on collateralised loans, as well as the Indonesian export bans. On Friday night aluminium rose 1% while copper and nickel each fell 1%.

Brent crude was as good as steady on Friday night at US$108.76/bbl while West Texas added US26c to US$102.77/bbl.

The SPI Overnight closed up 16 points or 0.3% on Saturday morning.

The buoyant mood continued on Wall Street from the open last night, sending the Dow up 46 points by midday despite no US economic releases of note. There was, at least, the Chinese May trade balance to consider, which showed a sharp rise in China’s trade surplus to above expectation. Yet while a 7% (year on year) increase in exports met forecasts, the 1.6% fall in imports did not match forecasts of a 6% increase, and defies Beijing’s attempts to stimulate China’s domestic economy.

Otherwise it was a typical “Merger Monday” on Wall Street, with various new offers being announced, but after two sessions totalling 186 points late last week to take in the ECB and the jobs number, it was time for some profits to be taken. The Dow got within sight of the psychological 17,000 mark, peaking out at 16,970. By 2pm the average was slightly negative, before a slight recovery to the close. The S&P closed up 0.1% to 1951 and the Nasdaq was flat. After all the panic, the Russell 2000 small cap index is back to positive for the year.

The Dow has now rallied 10,000 points since its GFC nadir, or roughly 140%. (Note that a 50% fall requires a 100% rally to return to square.)

St Louis Fed president and non-voting member James Bullard made an interesting observation last night. Previously unconcerned about inflation, Bullard noted that at 6.3% the US unemployment rate is getting closer to the 5.4% level the Fed considers “full employment”, and at 1.6% inflation is getting closer to the Fed’s 2% target. These are the “twin targets” during any economic cycle, and for 67% of the time since 1990 those levels have been further away from the mark than where they are now. Go back to 1960 and it's 75% of the time. Yet the Fed’s current interest rate is zero.

Bullard is hinting that the Fed is falling behind the curve, and interest rates need to start moving up sooner rather than later. Boston Fed president and non-voting member Eric Rosengren, normally amongst the most dovish of the members, chimed in last night to suggest that a cautious but predictable exit plan from QE might be the best way to avoid any market panic over a rate rise. Rosengren cited Wall Street’s calm acceptance of tapering to support his argument.

The important point to remember here is that tapering is only reducing the speed at which the Fed continues to build its balance sheet, ie to increase QE. Tapering does not decrease QE. So on one side we have one Fed member saying let’s get that rate up now, and on the other we have a suggestion to leave the rate alone and just start unwinding QE, carefully.

Whatever the case, the US ten-year yield is up only another tick to 2.61% and gold remains steady at US$1252.80/oz. The US dollar index has been climbing since the ECB’s policy announcement affected a weaker euro (albeit not before the shorts sparked a profit-taking rally on Thursday night) and is up 0.2% from Friday at 80.62.

The Aussie continues to be a victim, given the stronger greenback is a reflection not of a strong US economy as such but of ECB money printing. The Battler is up 0.2% from Friday at US$0.9352 to provide no reflection of the Australian economy. The Aussie can probably empathise with the Socceroos with regard the disdain with which the rest of the world is about to treat them.

The stronger greenback weighs on metal prices, but only as a dampener to the positives of ECB printing and an apparently strengthening US economy. Last night saw aluminium and zinc post 2% rallies, while nickel continues to stabilise since its big run-up on Indonesian bans and copper is crippled at present by the investigation into fraudulent Chinese collateralisation.

Spot iron ore went up US20c on Friday night and down US20c last night to be unchanged at US$94.30/t, where we left it for the long weekend.

Having hovered uncertainly for the previous two sessions, last night the oils decided it was time to put together ECB stimulus, the good US jobs result, China’s trade surplus and also yesterday’s revision of the Japanese March quarter GDP to 6.7% annual growth from the first estimate of 5.9% (which will crash in the June quarter on the GST increase, but so be it) and went for a run. Brent rose US$1.21 to US$ 109.97/bbl and West Texas rose US$1.78 to US$104.55/bbl.

The SPI Overnight closed up 14 points or 0.3% this morning, so that’s a net 30 points since the ASX was last open.

There’s not much to consider on the US data front this week until Thursday’s retail sales and business inventories releases. Friday sees the PPI and fortnightly consumer sentiment.

China releases its inflation data today and will provide a data dump on Friday of industrial production, retail sales and fixed asset investment numbers.

The RBNZ holds a policy meeting on Thursday and the Bank of Japan on Friday.

It doesn’t really matter what data are released in Europe given Mario Draghi has pledged “more to come” on the stimulus front.

Australia sees ANZ jobs ads today along with the NAB business confidence survey, housing finance and investment lending. Tomorrow it’s the Westpac consumer confidence survey and on Thursday our own jobs report.

The only scheduled corporate event of note this week is an investor briefing from Goodman Group ((GMG)) on Thursday but we remain wary of any unscheduled guidance “confessions” ahead of end of financial year.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon. If you reside around Wollongong, he'll be presenting later today, at 6pm at the Illawarra Master Builders' Club, 61 Church Street, Wollongong.
 

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