The Monday Report

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By Greg Peel

It was stumbling start for the ASX200 on Friday morning as sellers and buyers battled it out. In the end the buyers won, focusing particularly on beaten-down large cap banks, telco and supermarkets. The index turned from an early loss of 16 points to be up 20 at the close, and in so doing cemented 5300 as a true level of support.

Aiding the buyers’ cause was the previous day’s rebound in the Aussie of 0.8% to just over 88 cents, which relieved the selling pressure from the foreign perspective. Furthermore, it is always considered a good idea to square up ahead of a US jobs report.

Another potential fillip for markets on Friday was news the chief executive had agreed to hold talks with the student protest leaders in attempt to find a resolution. However the students elected to call off the negotiations when things turned nasty in Kowloon. This morning leaves us with the chief executive having given the protesters until today to leave, or "action will be taken".

Friday night was nevertheless all about US jobs, and if monthly non-farm payrolls data can be perfectly manipulated, this would have been the result contrived.

The US added 248,000 new jobs in September, above the 220,000 consensus expectation. I said on Friday to watch out for a revision to the weak August number, and sure enough it was raised to 180,000 from the earlier 142,000, and July was lifted to 243,000 from 212,000. The official unemployment rate fell below 6% for the first time since July 2008, dropping to 5.9% from August’s 6.1%.

So if you are a member of the “good news is good news” school, this was the result you wanted. The risk, however, was that the “good news is bad news” school would see things differently, that is, an imminent Fed rate rise and the end to monetary support.

But two other elements of the data set were notable. Firstly, the fall in the unemployment rate was aided by a further fall in the participation rate, to a 36-year low. Secondly, monthly wage growth was flat, and indeed has been largely flat in nominal terms for the last two years even as jobs growth has accelerated.

This implies the US labour market still suffers from excess “slack”, which is providing the foundation of Janet Yellen’s still dovish view. Only when the slack is cleared will wage rises be needed to acquire new workers, and in the meantime wage growth is actually negative on a “real” basis, taking inflation into account. This means no upward pressure on inflation, and that means no pressure on the Fed to raise rates quickly.

And thus we had a “Goldilocks” non-farm payrolls report. Something for everyone. The Dow rose 208 points or 1.2% while the S&P gained 1.1% to 1967, the Nasdaq added 1.0% and the Russell 2000 added another 0.8% after Thursday night’s strong rebound.

The 200 point rally in the Dow is the first since early March. The blue chip average is now back over 17,000 and the broad market S&P500 is within a mere 2% of its all-time high. But the fact this report was in balance, so to speak, was clearly evident in the US bond market. The US ten-year yield managed only a one basis point gain to 2.45%.

The US jobs report overshadowed all other data and geopolitical simmering on Friday night. It must be noted, nonetheless, that the global round of service sector PMIs out over 24 hours on Friday showed a consistent trend with Wednesday’s global round of manufacturing PMIs – slowing growth.

Australia’s service sector PMI fell to 45.4 in September from 49.4 in August. Japan provided some hope, with a rise to 52.5 from 49.9, indicating a swing into expansion, but there the good news ended. China fell to 54.0 from 54.4, the eurozone fell to 52.0 from 52.5, the UK fell to 58.7 from 60.5, and the US fell to 58.6 from 59.6.

At least we can continue to say the UK and US numbers are still strong in expansion pace terms, despite having eased a tad. On balance however, the greenback was the winner on the day. The US dollar index shot up 1.2% to 86.64, marking a twelfth straight week of gains. The Dixie is up 7.4% in 2014.

It was all too much for gold, which, having failed to rally on any of the problems facing the world at present as one might once have expected – Russia, IS, Ebola, Hong Kong – finally bowed to greenback strength and fell US$23.00 to US$1191.00/oz.

The Aussie dollar was also carted, down 1.5% to US$0.8673 to be back to where it was before the brief short-covering rebound.

One might also have previously expected a strong US jobs number, implying a strong US economy, would be bullish for oil prices. But we are in a new world. The US economy may be strong but the US is also becoming energy self-sufficient. Outside of the US, of which last week’s round of PMI data provided clear evidence, the global economy is slowing. Saudi Arabia, in desperation, is discounting oil export prices. And US dollar strength is working mathematically against dollar-denominated oil prices.

On Friday night, Brent fell US$1.57 to US$92.21/bbl and West Texas fell US$1.65 to US$89.72/bbl. Brent was down 5% over the week, its biggest weekly loss since February.

With China still absent, it was again quiet on the LME. The strong US jobs number balanced out weak global PMIs and thus left most base metals prices little changed. Aluminium managed a 0.8% bounce nonetheless, having slipped during the week, while volatile nickel shot up 3% after having seen some sharp falls earlier in the week.

One might expect a 200 point rally in the Dow would translate into exuberance on Bridge Street today, and be evident in the futures market. But after Friday’s 20 point rally for the ASX200, the SPI Overnight closed up a whopping 3 points on Saturday morning.

Bear in mind the ASX is open today but it is a public holiday for Labour Day in NSW and South Australia, and for the Queen’s birthday in Queensland. Cleary Queensland’s queen is younger than the one reigning over the rest of the country. The stock market will thus be deathly quiet with Sydney shut down, albeit potentially volatile on low volume. This is probably why the SPI Overnight is little changed.

With the jobs number in the can it’s a quieter week for US data releases this week. Tomorrow night sees consumer credit and Thursday wholesale trade, but the highlight of the week will be the releases of the minutes of the last Fed meeting due on Wednesday. While commentators suggest Janet Yellen is omniscient within the FOMC, interest will be centred on just where the views of the various members individually lie.

The Bank of Japan will hold a policy meeting on Tuesday. Despite disappointing data, no policy tweaking was forthcoming at last month’s meeting which came as a surprise to markets. This time perhaps? The Bank of England will also meet, on Thursday (apologies as I originally had this meeting down for last week in the calendar), and discuss the potential timing of the first rate rise in the other recovering developed market economy.

China will remain on holiday until Wednesday. The HSBC team will then return to work and publish their Chinese September service sector PMI.

It’s an interesting week for data downunder. We start with ANZ job ads series and the TD Securities inflation gauge today, followed by the construction PMI tomorrow, our own jobs numbers on Thursday and the RBA’s favourite data du jour, housing finance and investment lending, on Friday.

The RBA will hold a policy meeting on Tuesday and leave its cash rate unchanged, while likely providing updated commentary on the Aussie, which has fallen sharply since the August meeting, and on Australia’s housing investment bubble.

Bank of Queensland ((BOQ)) will report full-year earnings on Thursday and Woolworths ((WOW)) will publish its quarterly sales numbers on Friday.

Clocks went forward in relevant Australian states on Sunday which means for the next month the NYSE will close at 7am Sydney time, instead of 6am.

Rudi will appear on Sky Business 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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