The Overnight Report: Needn’t Have Bothered

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By Greg Peel

The Dow closed up one point while the S&P was flat at 2088 and the Nasdaq rose 0.2%.

Unease

The big jump in base metal prices on Tuesday night was not enough to counter a new ten-year low for the iron ore price, resulting in the local materials sector falling 0.5% yesterday. By contrast, a jump in oil prices ensured a 0.9% gain for energy.

Outside of tiny info tech, energy was the only sector to finish in the green yesterday. Bridge Street was struck with an uneasy feeling following Turkey’s shooting down of a Russian warplane. It is nevertheless interesting to note which sectors were sold down.

They were the defensives, which seems at odds in times of geopolitical fear. The telcos were down 1.1%, utilities 0.9% and the banks 0.9%, to mark the biggest sector falls on the day. The only explanation here is that in the recent rally, these stocks had been the most sought after.

Yesterday saw numbers for September quarter construction work done, which didn’t offer much in the way of surprise. The volume of construction work fell -3.6% in the quarter, in line with an annual run-rate of -3.7% decline. Consensus forecasts were for a fall of -2.0% but the trade-off was an upward revision to the June quarter numbers, to 2.1% growth from a previous 1.6%.

Segmentally, engineering fell -7.3% as the ramp-down of mining investment continues. The can was again carried by residential construction, up 2.0%, while non-residential remains in the doldrums with a -1.9% fall. All up, private sector construction fell -4.2%, offset by a 0.3% gain in public sector construction.

That will be the number to watch in 2016, or more particularly in 2017. There is no end in sight yet for the decline in “mining” construction, given the number of LNG projects still being built or tweaked. Engineering will thus continue to decline. Analysts are now forecasting a cooling in the housing market in 2016 and thus a drop-off in residential construction. Assuming there’s no boom in office block or factory construction on the cards, what will save the economy?

State and federal governments have extensive infrastructure plans on the table, which will begin to really kick in in 2017. Thus we will be looking for that public sector construction number to take the baton from residential.

The overall negative construction result will detract from next week’s GDP result. The more important factor for GDP is nevertheless today’s September quarter private capex numbers.

Meanwhile, yesterday’s numbers provided no reason to expect any change in RBA policy. The Aussie is relatively steady overnight at US$0.7255.

Dependent

Is the Fed data-dependent or is it not? Many feel the FOMC will hike next month regardless.

Last night’s flurry of US data releases included new durable goods orders, which showed a return to growth following two months of declines, rising 3.0%. Economists had forecast 2.1%. As ever, lumpy aircraft orders impacted on the numbers, and if transport is excluded orders rose by a more modest 0.5%.

Personal consumption rose a mere 0.1% in October, as it did in September, missing forecasts of 0.3%. Incomes rose 0.4%, up from 0.2% in September, in line with expectation. The Fed’s preferred measure of inflation – the core personal consumption expenditure (PCE) index, rose 1.3% year on year, as it did in September, missing 1.4% forecasts. This is the number the Fed supposedly wants to see at 2% before being comfortable about a rate rise.

That ain’t gonna happen before the next meeting, but the Fed believes the PCE will eventually move up to 2% growth, and thus last night’s numbers will not prevent a hike.

On Tuesday night we saw a shock result for the Conference Board’s monthly consumer confidence index. Last night Michigan Uni published its fortnightly survey, showing a fall to 91.3 from 93.1 a fortnight ago.

This week also saw an estimate for the November manufacturing PMI that suggested a 14-month low. The previous two months have also seen a slowdown in the service sector PMI, but last night’s flash estimate for November suggested a strong jump to 56.5 from 54.8 in October, beating estimates.

So a mixed bag there, and nothing that would cause the FOMC to about-face, assuming it is still data-dependent as stated.

And none of it was going to cause any excitement on the day before Thanksgiving, as tumbleweeds rolled through the NYSE after lunchtime. On very low volume, the US indices posted their tightest daily trading ranges in 2015. In other words, nothing happened.

Commodities

The same can pretty much be said for the oil markets last night. West Texas is little changed at US$42.97/bbl and Brent is little changed at US$46.09/bbl.

Things were a bit more active in London nonetheless. After a big short-covering rally, the likes of which we saw on Tuesday night, it is inevitable that the sellers will return. They duly did for copper, which closed down 1.8%, and for zinc, down 0.6%, but aluminium and lead held their ground.

Nickel was the star performer on Tuesday night with a 7% gain, and actually added another 1.3% last night, the reason being that Chinese nickel producers have agreed to meet on Friday to discuss production cuts. And I noted yesterday that tin was the “wood duck”, which sat oblivious in the pond when all its fellow metals took off. Well last night tin cottoned on and jumped 2.4%.

Iron ore closed unchanged at US$43.40/t, which for many junior miners could be considered a “win” at the moment.

A 0.2% rise in the US dollar index to 99.76 helped gold down US$4.20 to US$1070.60/oz.

Today

The SPI Overnight closed down 9 points.

As noted, today’s local data release is that of September quarter private sector capex, which is critical for both the ultimate GDP result and to RBA policy.

US markets are closed tonight for Thanksgiving.

On the local stock front, there’s another burst of AGMs today with the highlight no doubt being that of Woolworths ((WOW)), who’d better put on some pretty flash tea and bikkies.

ALS Ltd ((ALQ)) will release its half-year result.

Rudi will make his weekly appearance on Sky Business at noon (Lunch Money) and return from 6.30-7pm to be interviewed on his soon to be released book. Not to be missed!
 

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