The Overnight Report: Don’t Mention The Data

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By Greg Peel

The Dow closed down 7 points while the S&P was flat at 2098 and the Nasdaq added 0.1%.

Did anyone notice China’s April data dump yesterday was alarmingly weak?

Chinese industrial production rose 5.9% year on year in April, exceeding March’s 5.6% but missing forecasts of 6.0%. Retail sales fell to 10.0% year on year, down from 10.2% and missing expectations of 10.5%. Fixed asset investment plunged to 12.0% year to date from 13.5% in March to mark its lowest level in twenty years.

One might argue that April data are pre the recent PBoC rate cut but that was the third cut in six months, the RRR has also been slashed and other stimulus measures have been implemented by Beijing. Volatile February and March Chinese data can usually be dismissed due to the New Year disruption but by April, things should have settled down again.

No, no one noticed, because everyone was focused on the budget. Causing particular excitement was the proposed small business stimulus package, which saw the consumer discretionary sector jumping 1.2% on expectation retailers will see the biggest spending spree, on everything from laptops to socket sets, since 2009’s Pennies from Kevin. The banks rose 0.8%, probably because small businesses that don’t have $20,000 in the till will be keen to borrow it.

It was interesting that there was no mention of a proposed deposit tax in the budget, but that doesn’t mean it has been ruled out. A deposit tax is still on the table when the Treasurer gets round to addressing the FSI recommendations.

But overall, yesterday saw a level of positivity related to a budget which is not expansionary – the government is allowing a bigger deficit but not actually borrowing at today’s low rates to foster fiscal stimulus – but at least not as dangerously contractionary as the last spin of the wheel. At some point over the last twelve months Joe took a road trip to Damascus.

With regard to getting the budget through the Senate, the sticking point will clearly be the paid parental scheme about-face. But I’m happy to bet this was included as the big “nasty” that the opposition and crossbenchers would jump on. The government will concede ground, Labor and friends will claim victory and pass everything else, and there’ll be a lot of winking around the cabinet room.

Eurosurge

The first estimate of eurozone March quarter GDP came in at 0.4% growth, up from 0.3% in December, to mark the fastest pace of growth in two years. The zone economy grew faster than both those of the UK and the US in the period. The result was driven by a turnaround in fortunes for the economies of France and Italy, back into expansion, such that the four biggest economies among the nineteen in the bloc all posted growth.

Spain, near broke only a few years ago, led the pack with a 0.9% increase. The not so good news, however, is that growth in the biggest economy, Germany, slowed to 0.3% from 0.7%. The world’s third largest exporter should be enjoying the spoils of a lower euro but not according to last night’s numbers. There remains the issue of sanctions imposed on Russia but economists also suggest euro weakness will take time to flow into an improved export performance for the eurozone leader. Germany’s weak performance meant that the eurozone result of 0.4% actually missed 0.5% expectations.

The result in the breakdown that’s otherwise drawn a lot of attention is that of Greece, which saw 0.2% contraction and thus a fall-back into recession. Not surprising? In the September quarter last year, Greece was the eurozone’s fastest growing economy thanks to the weight of bail-out funds been thrown at the Greek economy. The European Commission has now pulled its earlier forecast for Greek 2015 growth of 2.5% right down to only 0.5%, and that assumes Greece gets the next tranche of bail-out funds that is presently stalled due to the Greek government’s stubbornness.

If I were Greece’s creditors, I’d be saying “the bail-out is not working anyway, and costing everyone else a lot of money”.

To put Greece’s March quarter contraction into perspective we might look at Cyprus’ result. A couple of years ago it appeared Cyprus might actually be the first eurozone victim but at 1.6% March quarter growth, the Cypriote economy was the fastest growing of all nineteen members.

Wet Sales

US retail sales were flat month on month in April, much to everyone’s dismay. Admittedly economists were only forecasting 0.1% growth but while fuel prices are now higher than they were a couple of months ago, the're still a lot lower than they were a year ago. Yet a forecast consumer rebound is simply not happening.

Initially Wall Street saw the bad news as good news, sending the Dow up 64 points. Aside from assumptions the Fed will hold off, US bond yields did begin to fall back as one would expect following weak economic data. But having hit a low of 2.16%, down 8 basis points, the ten-year yield immediately rebound to 2.26% to be up 2 basis points on the session. Again the stock markets were spooked, so they pulled back to close as good as flat.

Yesterday I mentioned that everyone was loaded up with corporate debt on top of government debt positions, reducing any great desire to buy more bonds. Another issue, of course, is that as of last October the Fed is no longer standing the market as a buyer (QE). Thus when a bit of selling is sparked, there’s a black hole to sell in to.

The US dollar index moved as might be expected on weak domestic data vis a vis the eurozone GDP result. It fell 1.0% to 93.66.

Bad news for the Aussie, and the RBA, nonetheless. Clearly the forex market is hell bent on playing the Aussie short, thus short-covering scrambles are becoming common place. On top of Joe’s more stimulatory budget and wildly optimistic economic growth forecasts, the big plunge in the greenback has sent the Aussie racing up another 1.7% to US$0.8108.

Data Driven

The big drop in the US dollar would normally be positive for commodity prices but that was not the case last night.

The Australian market paid no attention to yesterday’s Chinese data but commodity markets did. And they also pay attention to the eurozone’s GDP “miss” and to the weak US retail sales number.

Copper was flat but all other base metals fell in price on the LME, including a 2% fall for nickel.

Iron ore fell US30c to US$62.00/t.

West Texas crude fell US$1.14 to US$60.13/bbl and Brent fell US86c to US$66.41/bbl.

The only winner was gold, but then gold is strictly a currency and not a commodity. It dutifully rose US$22.10 to US$1215.10/oz, but still has gone nowhere for months.

Today

Back to earth? The SPI Overnight closed down 19 points or 0.4%.

Westfield Corp ((WFD)) is among those holding AGMs today while AusNet Services ((AST)) and SingTel ((SGT)) will post full-year results today, Graincorp ((GNC)) will deliver a half-year and Paladin Energy ((PDN)) will provide a quarterly update.

Bad news last night for ResMed ((RMD)) fans. The company announced its SERVE_HF heart failure trial has failed to reach primary goals hence the stock fell 15% in New York.

Rudi will be on Switzer TV tonight, Sky Business between 7-8pm, and again hosting Your Money, Your Call Equities, 8-9pm.
 

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