The Monday Report

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By Greg Peel

For months economists have been expecting the Bank of Japan to pump up the volume, to expand the size of Japan’s monetary base through QE. For months they’ve had to scratch their heads and wonder why no such expansion had been forthcoming, and why the BOJ governor seemed so sanguine about the outlook for the Japanese economy despite a big hit to economic data after the April sales tax increase, and lack of any notable recovery. She’ll be right, he kept saying, using whatever expression that equates to in Japanese.

And sure enough, Japan’s September data showed some much more positive numbers. Well you’ve got to hand it to ol’ Mr Kuroda, he seems to know what he’s talking about. It thus followed that no further stimulus announcement was expected from the BoJ after it met on Friday.

Markets were thus caught off guard when the BoJ announced it would expand its annual monetary base target to 80 trillion yen (US$724bn) from the previous 60-70 trillion target. No more so than the Japanese stock market, which registered an extraordinary 4.8% jump for the Nikkei. The timing is certainly interesting, given it corresponds with the termination of Fed QE. Implicit strength in the US dollar should lower the yen anyway, making Japan’s exports more competitive which, as an export economy, is an important factor for any stimulus package. Perhaps Mr Kuroda eyed off Mr Draghi at the recent finance ministers and central bankers meeting in Cairns and thought: if you’re going to move on QE, I’m going to beat you to it.

The news was certainly well received downunder, where the ASX200 had already leapt through the 5500 mark from the opening bell after a strong session on Wall Street. The index then rocked and rolled all day, before right at the death it appears someone put in a rather large Buy Australia order and pushed the index to up 50 points at the close. The gains were indiscriminate, with every sector contributing fairly evenly, including materials. It’s amazing what a forty cent jump in the iron ore price can do.

The news was also well received in New York, where the Dow jumped 150 points on the open and finished up 195 points or 1.1%. The S&P gained 1.2% to 2017 and the Nasdaq added 1.4%. Guess what? Both the Dow and the S&P500 hit new record highs on Friday night. The S&P posted the biggest weekly gain in two years.

The correction that was sparked by fear of an early rate rise from the Fed, and turned around by an easing of those fears, has been killed off on renewed expectation of a possible early rate rise from the Fed. It’s a strange world we live in.

Unsurprisingly, the US dollar surged to a new seven-year high against the yen, sending the dollar index up 0.7% to 86.85. The Aussie simultaneously fell 0.4% to 87.99. The US ten-year bond yield rose 3 basis points to 2.34%. It is interesting to note that when last the US stock market was at all-time highs before tipping over, the US ten-year yield rose to 2.60% as the correction began. Here we are making new all-time highs, and the ten-year is a full 26 basis points lower.

It is also interesting to note that back in July, Wall Street fell quite heavily when it was revealed US labour costs had risen a greater than expected 0.7% in the June quarter. The implication was that inflation may be rearing its ugly head, which would force the Fed to raise rates sooner rather than later. On Friday night it was revealed US labour costs rose another 0.7% in the September quarter, when 0.5% was expected, to mark the biggest back-to-back quarterly increase since 2008. But this time – new all-time highs.

And in a curious twist, Michigan Uni’s final consumer sentiment measure for October marked its highest level since July 2007 in posting 86.9, up from 84.6 a month ago, yet consumer spending dropped 0.2% in September to mark the first decline since January, when a 0.1% gain was expected. Lower oil prices nonetheless made an impact, and lower oil prices are a big positive for consumer spending in the long run.

The Chicago PMI also chimed in on Friday with a 5.7 point gain to 66.2 to mark its highest level in a year. Of particular note was a big jump in the new orders component.

So God’s in His heaven and all’s right with the US economy, it would seem. Fed rate rise? Bring it on! Never mind that in all likelihood, the Republicans will win a majority in the Senate as well as the lower house after the mid-term elections on Tuesday. For most capitalists on Wall Street, this would be a godsend, but it may also mean a return to US administrative stalemate if the GOP takes the opportunity to slam through changes such as the repeal of Obamacare, forcing the president to dust off his veto powers.

The victim of US dollar strength last week was the gold price, which on Friday’s big jump in the US dollar fell US$26.20 to US$1171.10/oz. The fall comes despite Japan announcing fresh money printing.

Base metals prices were mixed, with copper and tin falling offset by aluminium and zinc rising. Iron ore fell US50c to US$78.50/t.

It was a rare quiet night for oil prices on Friday. The stronger greenback helped West Texas down US30c to US$80.72/bbl and Brent down US8c to US$85.98/bbl.

The SPI Overnight closed up 8 points on Saturday morning. Given Wall Street’s surge on Friday night had a lot to do with fresh Japanese stimulus, Bridge Street had already taken this into account.

Japan may have provided a boost to markets on Friday but on Saturday, Beijing released its official October manufacturing PMI and that showed a fall to 50.8 from 51.1 in September, representing a five-month low. Forecasts were for a tick up to 51.2.

HSBC will release its version of China’s manufacturing PMI today, along with equivalents from Australia, the eurozone, UK and US, while Beijing will release its official services PMI. Everyone else will release services PMIs on Wednesday, except for Japan, which is on holiday today. The Japanese PMIs will be released on Tuesday and Thursday.

The US will also see construction spending and vehicle sales tonight, factory orders and the trade balance on Tuesday, the ADP private sector jobs report on Wednesday, chain store sales and September quarter productivity on Thursday, and the non-farm payrolls numbers on Friday.

The eurozone will see its monthly PPI on Tuesday and retail sales on Wednesday, before the ECB meets on Thursday. Now that Kuroda has made his shock move, will Draghi need to play catch-up? The Bank of England also meets on Thursday.

The Silly Season officially begins this week in Australia, marked annually by Melbourne Cup Day. Victoria will take a holiday on Tuesday but not the RBA board, which will meet to leave its cash rate unchanged.

Before the madness, today sees building approvals, ANZ job ads and the TD Securities inflation gauge along with the manufacturing PMI. Retail sales and the trade balance are out tomorrow. Wednesday sees the services PMI, Thursday the dart board known as the jobs numbers, and Friday the construction PMI along with the RBA’s December quarter Statement on Monetary Policy.

On the local stock front, Westpac ((WBC)) reports full-year earnings today while Woolworths ((WOW)) releases quarterly sales numbers. CSR ((CSR)) reports its full-year on Wednesday and Commonwealth Bank ((CBA)) provides a quarterly update. We’ve just about come to the end of the resource sector production report season and AGMs are beginning to taper off, albeit there are still a few to get through this week.

Rudi will appear on Sky Business on Wednesday at 5.30pm and on Thursday at noon.
 

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