The Overnight Report: Weakness All Around

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By Greg Peel

The Dow rose 91 points or 0.6% while the S&P gained 0.7% to 1946 and the Nasdaq added 1.0%.

Japan’s GDP contracted by 6.8% in the June quarter. In isolation, one might expect Prime Minister Abe would throw up his hands, pull out his sword and do the honourable thing. But in context, this post sales tax hike result follows the March quarter’s pre tax hike result of 6.1% growth. And the consensus forecast was for a 7.1% contraction.

Over six months, Japan’s GDP fell by an average 0.35%. This is still not a pleasing result when the Bank of Japan is throwing everything bar the kitchen sink at the Japanese economy. History suggests there is always a period of disruption post a sales tax increase (witness Australia’s introduction of the GST) before everyone gets used to the idea and life goes back to normal. But the BoJ may just be polishing the kitchen sink ahead of its next meeting.

China’s industrial production grew by 9.0% year on year in July, down from 9.2% in June. Retail sales grew by 12.2%, down from 12.4%. Fixed asset investment grew by 17.0% over the year to July, down from 17.3% over the year to June. Of the three numbers, fixed asset investment was the one that fell short of expectation. FIA for the 12 months to July marked only 13.7% growth, the lowest level since 2001.

We recall that last weekend’s July CPI result showed 2.3% inflation for China, well below Beijing’s 3.5% annual target. Hence there is plenty of scope for Beijing to inject further fiscal/monetary “mini” stimulus to ensure the 2014 GDP result lands on the 7.5% target, just as it did for the first six months.

On the home front, consumer sentiment is up 3.8% this month to 98.5 on Westpac’s index. As was the case with yesterday’s business equivalent, one can point to the removal of the carbon tax and expectations of a much watered down budget for the bounce. But the neutral level for this index is 100, and sentiment has been negative for the past five months, by varying degrees.

More concerning was a 0.6% rise in the June quarter wage price index, to mark 2.6% year on year growth. That’s the lowest rate since 1997, when the index was introduced. If we consider headline inflation is running at 3.0%, real wages are going backwards.

None of the above had much effect on the Australian market yesterday, given none of the above caused any shock. The Japanese and Hong Kong stock markets were both up for the session. If we take out the impact of the Rio Tinto ((RIO)) dividend and the less than surprising sell-off for priced-for-perfection Commonwealth Bank ((CBA)), the ASX 200 went nowhere.

The ASX200 continues to cling on to its Linus blanket, aka 5500.

Moving to Europe, eurozone industrial production fell 0.3% in June. This was a disappointing result given May also saw contraction, and economists had forecast a 0.3% rebound. For the June quarter, production fell 0.4%. Perhaps some solace can be found in the fact the euro remained elevated in June, before plunging in July after the ECB cut rates. Solace may also be found in the expectation Draghi will surely have to act again soon, but clearly Europe is becoming a big drag on global economic growth forecasts.

And by July, the impact of sanctions against Russia will hit the numbers. It is estimated sanctions to date will wipe 0.3 percentage points off Germany’s GDP. Germany’s June quarter GDP is due tonight (along with net eurozone GDP) and a contraction of 0.1% has been touted.

Wall Street, too, can take solace in knowing the central bank is there to act if necessary, or in the case of the US, not act. For an economy driven predominantly by domestic consumer spending, July’s retail sales growth result of flat on June, missing forecasts of 0.2% growth, was a disappointment. July marked the weakest growth in six months, and is not the way economists foresaw the start to the September quarter.

Department store Macy’s posted a shocker of a June quarter result last night, which sent its shares down 5.5%. At the other end of the scale, Walmart reports tonight and the company has been preparing the market for a result that won’t be pretty.

All of this adds up to one simple conclusion: the first Fed rate rise will now be later rather than sooner. Perhaps second half 2015 instead of first half, assuming such disappointment persists. And that means a stronger for longer, funny-money-fuelled stock market. Hence the rally in the US indices last night, which found the way left clear by no new news from the geopolitical hotspots.

To emphasise the point, the US ten-year bond yield fell 3 basis points last night to 2.41%. The US dollar index ticked up 0.1% to 81.61, but only because the euro fell more emphatically.

Australian economic data are sending mixed messages at present, serving to underscore the uncertain and wobbly transition from mining capex dependence. Record low wage growth implies absolutely no immediate inflation threat whatsoever, just as the RBA has been assuming, and thus no threat of a rate rise anytime in the foreseeable future. Rate cut? One day we say no, next day we say yes, and in between the RBA has been right all along: ”On present indications, the most prudent course is likely to be a period of stability in interest rates.”

The Australian economy nevertheless is beholden to this country’s greatest enemy – the Fed. That record low wage growth result released yesterday should have seen the Aussie down over 24 hours, but instead it’s up 0.4% to US$0.9304. The longer the Fed holds off on a rate rise, the longer the screws are being turned downunder. The sooner this country abandons the currency of our enemy as a reserve and starts dealing directly in the currencies of our trading partners, the better.

Gold rose US$2.30 last night to US$1311.20/oz. Base metals had a weak session, driven by the confluence of weak data out of all of Japan, China, Europe and the US. Recent movers lead and zinc fell 2%, while aluminium, copper and nickel fell 1%. Iron ore’s fresh tumble continues, with an US80c fall to US$93.20/t.

Last night oil traders decided the recent crude sell-off, specifically for Brent, has been overdone. Thus despite this week’s bearish demand-supply data and forecasts, Brent bounced back US$1.09 to US$104.11/bbl last night. West Texas was up a tad to US$97.33/bbl.

The SPI Overnight closed 25 points or 0.5%. No doubt we’ll blindly keep following Wall Street until the market realises the best thing that could happen locally is a big short-term correction for Wall Street, driven by a Fed rate rise, or the anticipation thereof.

The eurozone June quarter GDP is out tonight.

On the local stock front, Dexus ((DXS)), Fairfax Media ((FXJ)), Goodman Group ((GMG)) and Telstra ((TLS)) are among those companies reporting today. We might also see a result out of Crown Resorts ((CWN)), but ask three different brokers and you’ll get three different dates. If not today, then tomorrow, maybe.

Rudi will appear on Sky Business at noon.
 

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