The Overnight Report: Fedspeak Follies

This story features FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED. For more info SHARE ANALYSIS: FPH

By Greg Peel

The Dow closed down 36 points or 0.2% while the S&P lost 0.1% to 2120 and the Nasdaq lost 0.2%.

Capex Crash

In case you missed it on the news, or emblazoned across this morning’s papers, business spending in Australia is set to dive next financial year, despite the RBA’s specific efforts to encourage the opposite through rate cuts. Yesterday’s private sector capital expenditure and capital spending intentions data for the March quarter told a sorry tale.

Private sector capex in the March quarter fell 4.4% when economists were forecasting a 2.2% fall. Breaking that down, mining spending fell 4.1%, services 4.2% and manufacturing 9.4% (having bounced 8.0% in the December quarter). Consensus forecasts of 2.1% annual GDP growth in March are likely now to be trimmed ahead of the GDP release next week.

But that’s not the really bad news. That’s ancient history. The really bad news is capex intentions – a survey in which businesses declare what level of investment spending they’re planning for this financial year and the next. They are not held to their responses, and indeed spending intentions can change dramatically over time as the horizon looms closer, but the numbers do provide a guide to sentiment and a benchmark for RBA policy setting.

The last estimate for FY15, with one quarter to run at the time, was little changed but down 8.1% from the same time last year. The second estimate for FY16 is a whopping 24.6% lower than a year ago. Bear in mind we’ve had two RBA rate cuts in the interim. On the breakdown, mining is down 35% (having been down 19% at the first estimate provided three months ago), services is down 10% (-2% previously) and manufacturing is down 13% (-12% previously).

The market was shocked yesterday by two of these three elements. Sure, we know manufacturing is all but dead and buried in this country, and no great change there. Of course we know mining investment is on the decline, but the pace suggested by this result took everyone by surprise. And the big disappointment was services, which, given manufacturing’s demise, basically represents Australia’s “non-mining economy”. On the back of the RBA’s policy settings, the services number is the one that should be on the rise, indicating that Australia can stumble through the difficult transition from the “mining boom”.

Nup. On a standalone basis, yesterday’s results not only have “another rate cut on the way, maybe more”, written all over them, they have “recession” written all over them. And let’s not forget Wednesday’s construction work numbers also surprised to the downside, suggesting the only real bright spot in the Australian economy at present – housing – cannot alone support the transition.

There are other elements within the GDP yet to consider of course, including consumer spending for example. Interestingly, and as is always the case, the RBA meets next week one day before the official release of the March quarter GDP result.

Technicalities

So what do we make of yesterday’s action on Bridge Street?

The index opened higher form the bell on the back of the rebound on Wall Street but quickly fell through the morning. It was already down when the capex numbers were released mid-morning and they took the ASX200 down below the 5700 mark. And from there we bounced, right back up to square from 36 points down, before settling back a little at the close.

There was no pattern among sectors. Given the ups and downs one might say it was a stock-pickers market, but the fact a rebound was triggered after the index fell through 5700 would suggest technical buying. Is 5700 the new 5600?

Or did we rebound because on the back of the weak capex numbers, Australian bond yields fell and the Aussie plunged, ultimately by 1% over 24 hours to US$0.7656? A lower Aussie is good, and lower bond yields make yield stocks more attractive. Never mind worrying about exactly why the Aussie and bond yields are lower.

Fedspeak

As the first Fed rate rise looms, the Fedheads are out once again putting in their two bob’s worth. They say that if you put ten economists in a room you’ll get fifteen different opinions, and the same is true for regional Fed governors, be they FOMC members or not.

Last night the San Francisco Fed president said the central bank is likely to raise interest rates this year, echoing the recent thoughts of chair Janet Yellen. By contrast, the St Louis president said he wants to see “confirmation” the US economy is bouncing back from a weak first quarter before rates are hiked, while the Minneapolis president suggested the FOMC should be “extraordinarily patient”.

What is Wall Street meant to do with this information? Well even former chair Ben Bernanke, speaking from Sydney, has suggested markets should stop worrying about when the rate hike might be and just get on with it.

And how should Wall Street respond to positive or negative data releases? Last night’s data point was April pending home sales, which rose by 3.4% to mark a fourth consecutive monthly increase and a nine-year high. That number is up 14% year on year. Is this good news or bad news? Well, let’s just say the Dow fell a trifling 36 points.

Dollar Down

There was some blessed relief for commodity markets last night as the US dollar came off a bit after having rallied all week, down 0.4% to 96.92 on its index.

On the LME, aluminium, lead and zinc all rebounded 2% but copper and nickel were relatively steady.

The oils were a little higher, with West Texas up US32c to US$57.97/bbl and Brent up US65c to US$62.94/bbl.

Having dragged itself back up over 62 this week, the iron ore price slipped a little last night by US30c to US$62.30/t.

Gold is steady at US$1187.70/oz.

Today

The SPI Overnight closed unchanged. How “Friday” of it.

Locally today we’ll see April private sector credit numbers, another data point watched closely by the RBA.

Japan will dump inflation, industrial production and jobs numbers.

Attention in the US tonight will be focused on the first revision of the March quarter GDP result. Could it be a minus?

On the local stock front, Fisher & Paykel Healthcare ((FPH)) will report full-year earnings.
 

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