The Overnight Report: Bring On Jobs

This story features MEDIBANK PRIVATE LIMITED. For more info SHARE ANALYSIS: MPL

By Greg Peel

The Dow closed up 44 points or 0.3% while the S&P rose 0.4% to 1993 and the Nasdaq gained 0.1%.

More of the same

The major drivers of Wednesday’s big rally on Bridge Street were the banks, then daylight, then the resource sectors. Having pushed through 5000 for the umpteenth time, the green light is now on for the market to at least take a shot at 5200, if not the 5400 level chartists are flagging.

Yesterday simply saw more of the same. The banks led the charge again with a 1.8% gain, materials backed up with a 2.0% gain, with a little help from a stronger iron ore price (note the banks are now relatively a much bigger cap weight), and energy chimed in with 1.2% as, increasingly, it looks like the oil price might have stabilised.

There was little to speak of happening in other sectors. The banks and resources led us down, so it stands to reason they should lead us back up again.

Oil price stability, if that’s what we’re seeing, is important for LNG exporting. The iron ore price is holding above US$50/t on Chinese restocking but that must soon reach a conclusion. It is important to recognise the lag time between export prices pre-determined for cargoes delivered and spot pricing in relevant markets. Ditto the impact of the falling Aussie. This lag was apparent in yesterday’s January trade data.

Wednesday’s strong December quarter GDP result featured a surge in consumer spending to more than offset weakness in commodities exports. The bad news was a decline in volumes of exports as well as declining prices. Yesterday’s January trade data nevertheless showed a 1.2% increase in exports following the three months of declines over the December quarter. Exports are still reflecting the worst of commodity prices, but the weaker Aussie is starting to have an impact on AUD pricing.

The weaker Aussie is now also having the opposite effect on imports, which fell 1.1% in January. Foreign goods are becoming more expensive. The December quarter GDP was driven by consumer spending. If this now backs off in 2016, due to rising prices, and a predicted slowing in the housing boom, is there enough in non-mining to overcome weakness in mining going forward?

What we can place some hope in is that things do not look like they can get much worse for mining (and energy is included in the “mining” tag here). A rebound in commodity prices would be nice, but even stability of prices would be comforting such that, alongside the benefits of the weaker currency, mining at least stops dragging on the GDP.

The lower Aussie is also having an impact on Australia’s service sector, it would seem. The services PMI flipped back into expansion at 51.8 in February, up from January’s 48.4. Australians are shifting back to domestic services from overseas services (eg travel) due to the price.

The only problem, in the shorter term, is that the Aussie’s currently on a bit of a tear. Following Wednesday’s big jump, the Aussie is up another 0.9% at US$0.7356 thanks to a narrower trade deficit and strength in the services sector. There is no doubt an element of short-covering involved, given everyone was expecting the Aussie to be at 65 by now.

Around the Grounds

China’s service sector continues to expand, but the pace of that expansion continues to slow. Caixin’s independent China services PMI came in at 51.2, down from 52.4, and largely mirroring Beijing’s official number released on Tuesday.

China’s manufacturing sector continues to contract and keeps the world up at night, but the Chinese government is sleeping easy because contraction is the intention. Not so services, which is meant to take the baton. If investors want to worry about China’s economy, they should fret about the slowing pace of service sector growth and ignore manufacturing.

Japan’s services PMI rose to 52.4 from 51.5. The eurozone saw a fall to a 13-month low of 53.3, down from 53.6. The UK saw a fall to a near three-year low at 52.7, down from 55.6.

The US saw a fall to 53.4 from 53.5.

Waiting for Jobs

Wall Street took the services PMI as a good result, given economists had forecast worse. The oil market simply saw a weaker number, and sold off. The sell-off was probably due to some trigger happy day-traders, as oil came right back again to finish the session little changed, probably driven by those who see an improving trend (ie falling production).

The Dow was down 76 points on weak oil and rallied back to a stronger close, with oil. But volumes were low and volatility minimal as Wall Street awaits tonight’s all important non-farm payrolls report, the last jobs number ahead of the March Fed rate meeting.

That aside, last night’s January factory orders release showed a pleasing gain of 1.6% following two months of declines.

Commodities

LME traders noted indications of global base metal production cuts in sending prices higher for yet another session. Aluminium bucked the trend with a 1% fall, but copper, lead and tin were up 1%, zinc 2% and nickel 3%. Price rises were aided by a weaker US dollar, which fell 0.7% on its index to 97.55.

The dollar fell because of the weak US service sector PMI, despite similar weakness in the PMIs of Europe and the UK. The US service sector is far, far bigger than the US manufacturing sector.

If the US data continue to weaken then perhaps the Fed will adopt a more dovish tone at the March meeting. The greenback fall suggests this, and gold is up US$25.50 to US$1264.70/oz.

Iron ore rose US10c to US$51.70/t.

West Texas crude is steady at US$34.62/bbl and Brent is up a tad at US$37.10/bbl.

Today

The SPI Overnight closed up 5 points.

It would make sense that Bridge Street will also have a quieter session today, given two days of strong rallies, it’s Friday, and US jobs numbers are out tonight.

We will nevertheless see local January retail sales numbers today.

Medibank Private ((MPL)) is among a handful of stocks going ex-div today, and S&P/ASX will announce quarterly changes to index constituents, which will come in effect in two weeks’ time.

Rudi will appear twice on Sky Business today. First via Skype-link around 11.15am to discuss broker ratings and later, from 7-8pm, as guest on Mark Todd's Your Money, Your Call Fixed Interest.
 

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