The Monday Report (on Tuesday)

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By Greg Peel

RBA Watch

Just how certain is the market of an RBA rate rise today? Fairly confident, one might assume, based on Thursday trade on Bridge Street. A solid 0.6% gain for the ASX200 was led by 1% gains for the banks and consumer discretionary. Energy chimed in with a 0.8% rise on the back of a bounce in the oil price, while materials hung in there with a 0.3% gain despite the iron ore price falling under fifty dollars. A rebound in the nickel price helped.

The Aussie dollar has been quietly edging down for the past week, having quickly dropped back from its Fed-related spike the week before. Watch out for another short-covering snap-back if the RBA remains on hold this afternoon.

Jobs Watch

Wall Street saw typically thin pre-holiday trading on Thursday night, and typically quiet trading ahead of Friday’s non-farm payrolls release. The Dow closed up 65 points or 0.4%, the S&P gained 0.4% to 2066, and the Nasdaq added 0.1%.

The US bond market saw some selling in anticipation, with the ten-year yield rising 4 basis points to 1.90%. Books were squared on US dollar positions, sending the dollar index down 0.7% to 97.53. Gold was steady at US$1201.90/oz.

Iran Timetable

Iran and the West reached an agreement on Thursday night that would see the gradual lifting of sanctions beginning in June, assuming compliance with a list of requirements. This seemed a sudden turnaround from the night before, when an apparent stand-off led to a spike in oil prices.

Assuming all goes ahead as planned, Iran will begin to sell oil again from June. Market watchers expect a flood, as Iran moves quickly to recover the petrodollars lost in the long sanction period and sell oil at whatever price is available. The Saudis are none too pleased with the outcome of the negotiations, and they, too, are expected to sell oil more aggressively to maintain market share in this low oil price environment. We’re basically seeing one plays two globally in terms of extent of oil reserves.

Brent responded to the Iranian news with a 3% plunge, wiping out Wednesday night gains. It fell US$1.80 to US$54.93/bbl. The drop in West Texas was more subdued, with only a US39c fall to US$49.29/bbl. Mind you, that’s the May delivery month, and the price of June delivery WTI did fall a bit further. But at the end of the day, Iranian oil is more of a competitor to Brent than North American oil.

A mixed bag on the LME on Thursday night saw nickel continue its comeback, rising another 2.4%, while lead, tin and zinc all gained 1% but copper fell 0.8%.

On Friday morning, the SPI Overnight closed down 9 points.

Jobs Shock

A lot of jaws would have hit the floor on Friday night on the NYSE on the release of the US jobs number, if indeed the NYSE was open. It wasn’t, so Wall Street had all weekend to think about the implications of 126,000 jobs being added in March, when forecasts were for the low to mid 200,000s. The unemployment rate remained steady at 5.5%.

The February jobs number was a shock to the upside, so if we smooth things a bit the number is not quite as bad, but it did break a 12-month streak of plus 200k results. And the January and February numbers were trimmed on revision. Commentators were nevertheless quick to blame the weather, in a repeat performance of 2014. And just like 2014, they expect the numbers to improve through the spring.

Wall Street is also beginning now to focus less on the actual jobs result, which is proving to be volatile, and more on underlying wages growth, which is more important at this stage to the Fed. Wages grew by 0.3% in March, which is healthier than previous months, although at 2.1% annual growth, wages growth is not outpacing inflation.

All up, Friday’s jobs report has shifted the balance of expectation towards the end of the year, rather than the middle of the year, for the first Fed rate hike. At least until something comes along in the meantime to shift it back the other way again.

Stock Market Yo-Yo

The initial response to Friday's jobs number from Wall Street in last night’s trade was to sell, suggesting bad news is bad news even if it does delay the Fed. But there are still enough punters out there who see bad news is good news on that basis, and having fallen over a hundred points from the open, the Dow then turned around.

The turnaround was aided by comments from the New York Fed president who reiterated that the Fed’s rate decision is data dependent. William Dudley was also downbeat on the US economy, and highlighted the impact of lower oil prices on the oil industry as providing a drag despite the benefit to the consumer. This suggests a later rather than sooner rate hike.

Hence the Dow finished up 117 points or 0.7% last night, and thus 182 points higher since Bridge Street was last open. The S&P gained 0.7% last night to 2080 and the Nasdaq gained 0.6%.

The US ten-year bond yield is steady at 1.90% but the US dollar has bounced around over three sessions, given currency trading was open on Friday night in the US. The dollar index plunged on Friday night on the jobs number and rebounded last night along with stocks, such that it is down a net 0.4% at 97.12 over Friday-Monday.

Oil Market Yo-Yo

Thursday night’s drop in oil prices, noted above, was all about expectations Iran is set to swamp the market with oil and that Saudi Arabia would respond by lowering its prices in competition. Well last night the Saudis announced a surprise increase in its selling price to Asia, which analysts assume reflects increased demand from the region. This news caught oil traders by surprise, and yet gain we saw a short-covering scramble.

Throw in the weaker US dollar thanks to the shocking jobs report, and West Texas crude rose US$2.64 or 5.4% last night to US$51.93/bbl, and Brent rose US$2.88 or 5.2% to US$57.81/bbl.

UK markets were closed for Easter Monday, hence no base metals trading on the LME last night. The bad news for metals, however, is that over two sessions the iron ore price has fallen a net US$2.30 to a ten-year low US$46.70/t.

The weak jobs report has gold up US$12.10 to US$1214.00/oz on the assumption the Fed will hold off.

The Aussie dollar is steady from Friday morning, at US$0.7588.

The SPI Overnight was closed last night, thus Thursday night’s down 9 points does not take US jobs or Wall Street’s response into consideration.

The Week Ahead

The US published its March service sector PMI last night, which dipped to 56.5 from 56.9 in February and was not as bad as expected. Australia, the eurozone and UK will publish services PMIs today and tonight.

It’s a quiet week in the US data-wise, with wholesale trade and chain store sales the only real highlights on Thursday. But the minutes of the last Fed meeting are due out on Wednesday and will prove popular reading.

The Bank of Japan will meet on Wednesday, and we’re still waiting to see whether the race to the bottom may be stepped up yet again, while the Bank of England is not expected to make any changes on Thursday night.

China will release March inflation numbers on Friday.

It’s a busier data week in Australia, albeit the usual pattern of our jobs numbers following a week later than the US numbers has been disrupted by Easter, such that our March numbers have been pushed out to next week.

But we will see ANZ jobs ads, retail sales and the services PMI today, the construction PMI on Thursday and those increasingly important housing finance numbers out on Friday.

The housing finance data will, nevertheless, be too late to influence the RBA at its meeting today. Unless you’ve been living under a rock of late, or perhaps holed up over Easter in a sodden camp ground, you’ll know a large number of economists expect a rate cut today and the balance says May.

All will be revealed at 2.30pm east coast time.

The ex-div run has just about come to an end on the ASX, down now to only a trickle, but this week AWE Ltd ((AWE)) and Energy Resources of Australia ((ERA)) kick off the quarterly resource sector production report season.

Rudi will appear on Sky Business on Wednesday at 5.30pm and he later that day he will host Your Money, Your Call between 8 and 9pm. On Thursday he'll re-appear at noon and again between 7-8pm for the Switzer Report.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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