The Overnight Report: America Disinflates

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By Greg Peel

The Dow fell 10 points, the S&P fell 0.2% to 2110 but the focus is on the Nasdaq, which rose 0.4% to 4987.

Local Dip

A couple of sessions of nervous indecision following a bout of results season euphoria finally gave way to selling on the local market yesterday. There is no great surprise. As yesterday’s FNArena Short Report noted, many a positive surprise during the first really busy week of result season sparked significant short-covering, exacerbating upside moves in individual stocks and thus index levels. It was not all fresh buying.

Yesterday’s disappointing private sector capex numbers were also a drag on the market yesterday. The damage was done early, before the capex release. But the release did kill off a late morning attempt by the index to recover.

Capex Shock

The December quarter actual capex data indicated the Australian economy was doing what was hoped, with non-mining capex rising 14% in 2014. But more important to economists, and the RBA, are the forward-looking capex intentions numbers. The survey indicated 2014-15 capex plans are in line with expectation, with non-mining capex rising 8%. But the first 2015-16 survey shows a surprise 10% drop in non-mining capex, alongside an unsurprising 21% drop in mining capex.

This is not the way it’s meant to play out.

The economists at CBA are quick to point out that the first estimate is always the least reliable an indicator. That’s understandable, given those surveyed are asked to state their intentions almost six months out from the financial year in question even beginning (survey conducted over Jan-Feb). At the time, we were all very worried about plunging commodity prices.

But CBA, for one, nevertheless believes these weak numbers feed into the RBA’s monetary policy thinking, and that we will see another rate cut next week.

Greenback Flies

The weak capex numbers set off selling in the Aussie dollar once more, after the currency had experienced a sharp short-covering rally over the previous 24 hours. The Aussie fell around half a cent to the local close of trade, but by the time London was coming on line the world was buying Aussie again, pushing the currency back over the 79 cent mark.

But this morning the Aussie is down a full cent from 24 hours ago, at US$0.7787. It’s not about local capex, it’s all about a surging US dollar. The US dollar index is up 1.2% to 95.31.

It looks like a few traders might have been caught short the greenback as well. Last night the US saw the January CPI number, and it showed a 0.7% drop in the headline, for a 0.1% drop year-on-year. This met expectations, given the plunge in the price of oil. But the core CPI, ex food & energy, rose by 0.2%, to 1.6% year on year, when economists had expected a 0.1% gain. That was enough, apparently, to imply US inflation will indeed push its way back towards 2% just as the Fed insists it will. Hence, perhaps rates will rise sooner rather than later.

The US bond market took that to be the case, sending the ten-year yield up 5 basis points to 2.02%. But as for the US stock market, well, I’ve said it before. As each day goes by it seems Wall Street becomes increasingly tired of rate rise speculation, and more so of running back and forth like headless chooks on every little perceived change in language subtlety. One way or another, US rates are going to rise sometime soon, probably this year, and if you’re not ready for that well, that’s your problem.

Meanwhile, economists suggest tonight’s first revision of US GDP might see the number beginning with a “1”, down from the 2.6% first estimate which disappointed at the time.

Oil Tanks

Just when it looked like oil might just have picked its bottom, down we go again. Last night West Texas fell US$2.09 or 4% to US$48.70/bbl and Brent fell US$1.22 or 2% to US$60.44/bbl.

This time the market blamed the oil plunge on the soaring greenback, but that’s just last night’s excuse. Stock market traders might be tired of being headless chooks but Nymex traders can’t seem to get enough of it. It’s likely all part of a lengthy and volatile bottoming process, so best just to pull up a deck chair and watch from the sidelines.

Copper Shines

My point is underscored by the fact the same US dollar denominates the value of base metals, and last night on the LME copper jumped 1.7%. Other metals were around 0.5% stronger, except for tin.

Traders nevertheless dismiss assumptions the Chinese must be back in buying copper. Drought conditions in Chile are hampering production by Australia’s two heavy-hitters, and that has drawn LME attention. Meanwhile, the fact the Chinese seem less than keen on buying iron ore would corroborate. Iron ore is down another US40c to US$62.50/t.

Gold is up US$3.10 to US$1208.30/oz.

Today

The SPI Overnight closed up 7 points.

Locally we see monthly private sector credit data today while Japan will provide a data dump of inflation, output, sales and jobs numbers. All eyes are on the US GDP revision tonight.

And hallelujah, it’s the last day of the local reporting season today. Not that it’s not all very exciting of course, but there are some very weary people around at FNArena.

Harvey Norman ((HVN)) and Woolworths ((WOW)) will steal the show today, but there is still quite a bunch.
 

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