The Overnight Report: Still Heading South

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This story features NEWS CORPORATION, and other companies.
For more info SHARE ANALYSIS: NWS
The company is included in ASX200, ASX300 and ALL-ORDS

By Greg Peel

The Dow closed down 75 points or 0.5% while the S&P fell 0.6% to 1909 and the Nasdaq lost 0.5%.

Lies, damned lies, statistics and “sample rotation”. Yesterday the ABS announced 14,500 new full-time jobs were created in July, which should be positive news. Unfortunately 14,800 part-time jobs were lost, meaning a net fall of 300 jobs when economists had predicted a rise of 13,000. But the real crunch came in the “unemployment rate”.

Only three months ago, economists were starting to believe the unemployment rate may have topped out just under the 6% mark. But yesterday’s number suggested a rise to 6.4% from 6.0% in June, to record the highest level in a decade. The Chicken Little response from the mass media was overwhelming. Politicians on both sides in their typical, nauseatingly pathetic manner, blamed each other. But is the sky really falling?

We are reminded that the “unemployment rate” measures only those who are looking for work. When more people look for work, the “participation rate” rises and serves to add to the number of official unemployed. The greatest proportion of last month’s unemployment rate increase was represented by youth. They did not lose jobs, they simply signed up for the dole and started looking for jobs. When we consider the government’s budget threat to cut school leavers and tertiary graduates out of any benefits for the first six months, it is not hard to understand why there may have been a rush to sign up.

Then we come to “sample rotation”. The unemployment rate is derived from a statistical sample set, not from an all-encompassing study. Each month the RBA rotates one eighth of its sample set to a new group of respondents, and as it happens, last month it rotated straight into a hot bed of joblessness. The ABS itself admits one third of the increase in unemployed in July can be attributed solely to this rotation.

But wait, there’s more. Last month the ABS altered its definition of the “labour force”. The bureau suggests the changes should not be statistically significant, but when we put it all together, it seems more and more like June’s number represented 6.0% of apples and July’s number 6.4% of oranges.

So what if we're to put it this way: In July in Australia, population 23 million, 300 jobs were lost. OH MY GOD! There has to be a rate cut!

Sounds a bit silly really. The fact the unemployment rate is now higher than it ever was in the depths of the GFC is also a case in point. Economists were flabbergasted when the unemployment rate did not surge higher at the time, until it was realised employers were doing everything they could to avoid actual sackings. Wages were cut, hours were cut, positions were shifted from full to part-time, but many people managed to hang onto their jobs.

So what if we were to put it this way: In July 14,500 full-time jobs were added in Australia.

The next RBA statement will make for good reading. We recall that for however many months now, the RBA statement has included the line: “There has been some improvement in indicators for the labour market this year, but it will probably be some time yet before unemployment declines consistently.”

The good news is forex cowboys don’t wait to first read the fine print. The Aussie is down 0.9% to US$0.9270, all due to the jobs number. As for the stock market, well the whopping 3 point fall in the ASX200 yesterday perhaps tells a tale.

We also learnt yesterday that Russia had slapped import bans on food products from across the West, including from the US, Europe and Australia. Never mind that Australia has not officially imposed any sort of sanctions on Russia. Either way Putin’s retaliation is now in full swing, and that is very much impacting on global sentiment.

Those hoping for swift and decisive action from the ECB last night would have been disappointed. While Mario Draghi acknowledged that risk to the eurozone recovery is “skewed to the downside”, in part due to the Ukraine conflict, he dismissed the most recent fall in zone inflation as being simply food-related, and announced no new policy measures. Draghi is convinced the ECB’s two month-old policy of negative central bank deposit rates will have the desired impact, just not straight away.

He did, nevertheless, declare that eurozone and US policy are now on a “divergent path”, referring to Fed tapering and talk of a rate rise, and that ECB rates will remain lower for a lot longer yet. The euro decided this was enough to suggest a fall, hence the US dollar index is up 0.1% to 81.51.

Despite this “divergent path”, the US ten-year bond yield last night broke down through its 2014 low to its lowest level in thirteen months, falling 5 basis points to 2.42%. It is easy to explain this as a “flight to safety” response in the wake of escalating tensions with Russia, but there are few in the US who believe the Ukraine will ultimately have any meaningful impact on the US economy. The same cannot be said for Europe however, and hence the fall in the US yield is merely a reflection of interest rate differentials. The German ten-year yield is now at 1.06% and French at 1.49%. Even the in surging economy of the UK, where rate talk is rife, the yield is only 2.48%.

Coming back to jobs, last night’s US weekly new jobless claims number fell below 300,000 for the second time in three weeks. This was enough to provide for an initially positive start on Wall Street, until Euro-watching took over. The German DAX index fell another 1.0% last night, reaching a perilous 9025 before closing at 9038. As I noted yesterday, commentators fear a breach of 9000 in Germany will be enough to set in train a full-blown correction on Wall Street. Mind you, there is little agreement on the supposed quantum.

The Dow did manage to fall over 100 points at one stage but despite a 5% pullback from the high, is still only now dancing with its 200-day moving average. A rebound followed, but lost a bit of steam at the death.

So we enter Friday with the pall of Europe’s newly tenuous position hanging overhead. Global markets are currently wary of weekends, and are thus inclined to square up ahead of the two days they can’t react. This usually means selling. We do note, nevertheless, that while gold is rallying again, up another US$5.70 to US$1311.60/oz last night, it’s not exactly flying to the moon.

After having mostly fallen in recent sessions despite the possible implications of the tit-for-tat sanction game, the oils did finally rise last night. Brent jumped US$1.12 to US$105.75/bbl and West Texas rose US71c to US$97.58/bbl.

Base metal price moves were indecisive on the LME, as volatility continues in the thin summer trade. Lead rose 1% and zinc fell 1%. Iron ore rose US10c to US$96.00/t.

The SPI Overnight fell 23 points or 0.4%.

News Corp ((NWS)) came out with its quarterly result in the US this morning and reported a slight miss on earnings but a slight beat on revenue, and its shares are flat as a tack in the after-market.

REA Group ((REA)) is the other local stock reporting earnings today.

We’ll also see June housing finance and investment lending data and the RBA will release its September quarter Statement on Monetary Policy.

China will release its July trade balance today ahead of inflation numbers tomorrow, and the Bank of Japan will hold a policy meeting. Focus in the US will be on June quarter productivity.
 

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