Daily Market Reports | May 20 2016
By Greg Peel
The Dow closed down 91 points or 0.5% while the S&P lost 0.45 to 2040 and the Nasdaq fell 0.6%.
Jobs Conundrum
Having held their ground on Wednesday, while other sectors responded to the prospect of a Fed rate hike, yesterday the resources sectors gave way. It was nothing about commodity prices on the day, it was about where commodity prices might end up if the US dollar rises on Fed tightening. The offset of the weaker Aussie made no difference, it would seem.
These sectors have run very hard these past couple of months on the commodity price rebound, so it looks like profits are being taken. Materials fell 2.6% yesterday and energy 2.0%, to provide the bulk of market weakness.
Yield sectors – telcos, utilities and supermarkets – continued to be sold, while the banks, healthcare and consumer discretionary all moved little on the session. Yesterday’s jobs numbers showed an unchanged unemployment rate, and appeared to have no exogenous effect on the market.
The jobs data showed an increase of 10,800 in April, roughly in line with expectations. But the aggregate represents a 20,200 rise in part-time jobs and a 9,300 fall in full-time jobs. This has been the trend in recent months.
The March quarter wage price index, released earlier in the week, revealed the weakest wages growth in decades. Dragging on wages growth is hours worked, which fell 1.1% in April to be down 0.5% year on year – the first negative number since May 2013. The fall in hours worked can be explained by the ongoing rise in part-time work and loss of full-time work.
Overall jobs growth over the past four months has averaged only 6,500, Commonwealth Bank’s economists note, which should be sufficient to send the unemployment rate higher on the balance of population growth. But the unemployment rate, steady at 5.7% in April, has been held down by a falling participation rate – fewer people looking for work.
“Digging below the surface shows that today’s employment report is softer than the headline numbers imply,” says CBA.
We might recall this from the RBA’s April policy statement:
“Over the period ahead, new information should allow the Board to assess the outlook for inflation and whether the improvement in labour market conditions evident last year is continuing.”
The outlook for inflation weakened, hence the RBA cut in May. The May statement suggested “Labour market indicators have been more mixed of late”. The subsequent April data look even more mixed. Cleary yesterday’s jobs number only serves to strengthen the case for another RBA rate cut.
Would the RBA go again as early as June? Unlikely. The Fed meets later in June and presumably the RBA would prefer to wait to see if it can score a rate cut by default if the Fed chooses to hike. Mind you, the Aussie, which is holding steady at US$0.7227, has already priced in a second RBA cut.
More Fedspeak
As long as the US economy continues to perform to the expectations of New York Fed president William Dudley, then “I think a tightening in the summer, the June, July timeframe is a reasonable expectation,” Dudley said last night. The Dow subsequently fell another 200 points.
The Dow managed to claw back a hundred points over the course of the afternoon but the theme remains the same – all of a sudden the Fed rate hike no one was expecting in June is now a possibility. Not a strong possibility, despite Fedhead jawboning – the market is currently pricing in a 26% chance – but a possibility nevertheless.
It is assumed, however, that if the Fed does not end up hiking in June or July, the purpose of recent more hawkish commentary and insistence June is “live” is more about making sure markets prepare for when there is a rate hike, maybe later in the year, and not be caught out by one, prompting undue volatility.
After a string of very poor earnings results from US major chain stores, the tide has turned a little as the earnings season draws to a close. Good results were posted last night by a couple of specialist apparel chains, and Wal-Mart surprised and enjoyed a 9% rally, which went a long way to buffering the Dow.
It is more likely, nonetheless, that this is a response to a result that was not as bad as had been feared following earlier shockers from major chains, which had investors dumping Wal-Mart in the lead-up.
A close of 2040 on the S&P500 last night means a breach of the 2043 level, which is technically significant for the simple reason it is the “flat on year” point. Traders have been suggesting a breach of this level could set in trend to a more pronounced down-move.
Commodities
A report suggesting a solid rise in US oil demand last week helped keep prices supported last night. West Texas crude is up US36c at US$48.24/bbl and Brent is up US32c at US$48.86/bbl.
The US dollar index is slightly higher over the period, up 0.1% at 95.30.
Given the LME was closing just as the Fed minutes were released the night before, last night’s price action is more indicative of a response. Aluminium fell 0.5%, copper, lead and nickel 1% and tin and zinc 1.5%.
Iron ore fell US20c to US$55.70/t.
Gold is down US$3.30 at US$1254.70/oz.
Today
The SPI Overnight closed down 6 points.
The shares of the big miners were weak again in London last night, but it’s a case of who is following who.
Woodside Petroleum ((WPL)) holds its AGM today.
It is Rudi's intention to link up with Sky Business through Skype this morning but election coverage might throw a spanner. If the plan goes ahead he should appear around 11.05am.
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