The Monday Report

This story features KAROON ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: KAR

By Greg Peel

Running in Fear

Fear of a September Fed rate rise had been building in the local market as we moved towards Friday, evident in selling in yield stocks. Things came to a head on Friday with forecasts of 185,000 jobs to have been added in the US in August which, it was assumed, would be enough to force the FOMC’s hand.

Nor did it help that the ASX200 broke strong technical support at 5400 from the opening bell, ensuring a weak session. A brief attempt by the buyers to push the index back was destined to fail and when it was all said and done it was a Friday – always a good day to sell, and this time more so given the US long weekend.

The banks led the selling on a cap-weight basis with a 1.0% fall while telcos and healthcare each fell 2.1% to be joint losers among the sectors. Utilities backed up with 0.9% and industrials, which includes some faithful dividend payers, lost 1.1%. Only the resource sectors finished in the green, slightly, thanks to supportive commodity prices and the fact they’d already had a bad week.

But all is forgiven. The US jobs number fell short, and the futures are suggesting an opening gain of 31 points, which would take the ASX200 back over 5400 and potentially stave off more substantial weakness.

Couldn’t have been worse

As far as US monthly jobs results go, August’s result on Friday night was nothing short of frustrating. At 151,000, the number fell short of 185,000 estimates.

But not that short. The bottom line is, 151,000 is not a number to end Fed speculation one way or the other. Indeed it is a number that has divided economists and ensured we’ll be arguing the case back and forward for another two weeks.

Had the number been in excess of 250,000, as was the case in both June and July, the assumption would be yes, the Fed will raise this month, and now we can all get on with it. Had the number been something like 120,000 we could have said no, clearly the Fed won’t raise this month, and now we can all get on with it, at least until it’s time to start discussing December.

But at 151,000, and an unchanged unemployment rate of 4.9%, half the market is saying yes, it’s still enough, and the Fed has been setting us up for a hike. The other half of the market is saying that a number short of estimates, and a drop-back in wages growth to 0.1% for the month, means no, a hesitant Fed will have an excuse to hesitate once more.

So take your pick.

The various markets took their picks on Friday night, in either direction.

The US dollar index initially plunged on the jobs release, suggesting no hike, before turning around and closing up 0.3% at 95.88. A stronger dollar should be a drag on gold, but gold is up US$11.20 at US$1324.80/oz, suggesting no hike.

The US ten-year bond yield closed up 3 basis points at 1.60%, suggesting a hike. Commodity prices were both up and down. The US stock markets opened up on the news – probably suggesting relief that there would not be a hike, before dropping mid-session as the debate raged, and finally recovering to a modest gain on the day.

The Dow closed up 72 points or 0.4%, the S&P gained 0.4% to 2179, and the Nasdaq rose 0.4%.

Not even a US jobs number day could break the Dow/S&P run of sessions of no move in excess of 1% in either direction, which has now extended to forty.

So how do we interpret these moves? We don’t. We’ll likely just have to wait till September 22.

Commodities

West Texas crude closed up US69c at US$44.22/bbl, suggesting the technical bounce off 43 was more influential than jobs.

Aluminium fell 1.5% but lead rose 0.5% and nickel and zinc rose 1%, with copper off a tad.

Iron ore rose US60c to US$59.00/t.

As noted, gold jumped US$11.20.

With the US dollar index up 0.3%, the Aussie is actually up 0.2% at US$0.7570.

And also as noted, the SPI Overnight closed up 31 points or 0.6% on Saturday morning.

The Week Ahead

US markets are closed tonight. It’s a quiet week thereafter for US data, but the Fed’s Beige Book will be released on Wednesday.

It’s far from a quiet week in terms of Australian data.

Today we’ll see the service sector PMI, along with everyone else except the US, which will publish tomorrow night. We’ll see the local construction PMI on Wednesday.

In terms of other monthly data, today it’s ANZ job ads, on Thursday it’s the trade balance, and on Friday it’s housing finance.

In terms of June quarter data, today we’ll see company profits and inventories and tomorrow the current account, including the terms of trade. On Wednesday the GDP result will be released. Expectations are for an ease-back in quarterly growth to 0.4%, down from March’s shock 1.1%, but for the annual rate to increase to 3.2% from 3.1%.

The RBA will hold a policy meeting tomorrow but no change is likely, given (a) they moved last month, (b) they usually don’t move ahead of a GDP result and (c), there’s no clarity around Fed policy.

The ECB will hold a policy meeting on Thursday, just to add to the fun.

China will release trade numbers on Thursday and inflation on Friday.

On the local stock front, we’ll see out-of-cycle earnings reports from Karoon Gas ((KAR)) tomorrow, Sigma Pharmaceutical ((SIP)) and Xero ((XRO)) on Thursday and Premier Investments ((PMV)) on Friday.

It’s a big week for companies going ex-dividend, acting as a natural drag on the index.

Rudi will appear on Sky Business on Tuesday, via Skype-link, to discuss broker calls at 11.15am. He'll be in the studio twice on Thursday. First from 12.30-2.30pm and again for an interview on Switzer TV between 7-8pm. He'll repeat the Skype-link up around 11.05am on Friday.

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