The Overnight Report: Good Enough

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By Greg Peel

The Dow closed down 5 points while the S&P was flat at 2108 and the Nasdaq gained 0.3%.

Strength

I noted yesterday that the rally on Bridge Street on Wednesday had a cyclical theme to it, as the materials and industrials sector led the way and the defensives, such as consumer staples and utilities, were left behind. Well if that were to be a new theme, it only lasted a day.

Yesterday saw another steady rally and again materials kicked in with a 1.2% gain on a jump in the iron ore price. Energy suddenly decided to jump in slight oil price improvement, rising 2.3% having been left behind the day before. But yesterday it was the turn of industrials to be flat, and for the defensives to play catch-up. Utilities rose 1.9% and consumer staples rose 2.0%.

So go figure.

Whatever the theme, the ASX200 has recovered a lot of the ground back towards the 5700 level which has proven the most recent stumbling block. As to whether this level can be reclaimed will likely come down to corporate earnings, as reports begin to flow next week.

It won’t come down to economic data, it would seem. Yesterday’s June quarter import/export price data showed a 4.4% fall in export prices, to be down 8.9% for the year, and a 1.4% rise in import prices, to be up 1.3% for the year. CBA economists thus calculate a 5.8% drop in the quarter for Australia’s terms of trade, which is the biggest plunge since GFC-impacted 2009. The Aussie trade-weighted index did not move much in the quarter, so it’s not a currency effect.

But not a great shock really either, one might suggest. On the import side, lower iron ore and coal prices were the culprit and on the import side, the rebound in the oil price is blamed.

Yesterday’s June building approvals data looked a bit shocking, showing an 8.2% plunge. Housing construction is the only segment of the economy really firing at the moment to provide an offset to the mining sector. But approvals are still up 8.6% year on year, and the 8.2% drop was all about a 20% fall in lumpy apartment block approvals while single homes increased 4%.

So nothing to panic about there, as the ASX200 indicated yesterday.

Not Too Bad

Consensus had the US June quarter GDP forecast at either 2.5% or 2.6% growth depending on which survey you source, so the result of 2.3% was somewhat of a disappointment. Enough of a disappointment, it would seem, to send the Dow plunging 100 points from the open. But by lunchtime the US indices were back to square again, where they remained for the rest of the session.

The result is not too bad considering how bad the March quarter was and how much of a drag the stronger US dollar is proving. Indeed, the March quarter result was revised up to plus 0.6% from minus 0.2%, which is not insubstantial. What did catch commentators’ attention nonetheless was the quarter’s PCE (personal consumption & expenditure) reading which is the Fed’s preferred benchmark for inflation. It rose 1.8% in the quarter but is only up 1.3% year on year.

The Fed wants to see 2%. If oil and other commodity prices remain weak, 2% seems a long way away. But must inflation actually rise to 2% for the Fed to raise, or must it at least be seen to not fall further?

This is the pivotal point of the ongoing rate rise debate. On the one hand, inflation as low as 1.3% does not justify a rate rise, thus the Fed will likely not move this year. On the other hand, growth of 2.3% and unemployment of 5.1% does not justify a rate of zero, so the Fed will still move in September, assuming inflation doesn’t suddenly take a turn for the worse in the meantime.

I still believe the Fed is determined to get the first move behind it. It may come down to two more non-farm payroll reports before the next meeting along with CPIs and all sorts of other data points.

Currency traders certainly didn’t see the June quarter numbers as postponing a rate rise. The US dollar index is up 0.3% to 97.47.

Commodities

The stronger greenback doesn’t help commodity prices, and as the summer wind-down approaches for northern hemisphere industry, base metal prices are finding it difficult to maintain support. All metals bar tin fell last night, including a 1.3% drop for copper and 2.1% for nickel.

After its big jump on Wednesday, iron ore fell back US70c to US$54.60/t.

The oils were a little weaker, with West Texas falling US42c to US$48.46/bbl and Brent falling US31c to US$53.32/bbl.

Gold decided to fall US$8.50 to US$1088.20/oz.

The Aussie dollar is flat at US$0.7291.

Today

The SPI Overnight closed up 9 points.

Today sees Australia’s June quarter producer price index number, along with month of June private sector credit.

There’ll be a late rush of resource sector quarterly production reports out today, including that of Origin Energy ((ORG)), while earlier this morning ResMed (RMD)) announced its June quarter and full-year result after the bell in New York, and on the NYSE is up 0.7% in the aftermarket.
 

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