The Overnight Report: Fed Waits And Watches

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By Greg Peel

The Dow closed up 26 points or 0.1% while the S&P was flat at 2279 and the Nasdaq rose 0.5%.

Defensive

The local market finally consolidated yesterday after its sharp pullback, managing a rally which grew in strength as the session progressed. It appeared as if the buyers were waiting to see if there was to be anymore selling, and there wasn’t. It was also the first day of the new month.

The pattern yesterday was very much different to that we’ve seen since last year when, firstly, the Fed looked set to raise rates, and secondly, when Trump was elected. Almost all sectors finished in the green yesterday but the leaders were utilities (+1.4%), telcos (+1.1%) and consumer staples (+1.2%). Aside from these sectors being sold off last year to fund reinvestment in cyclicals such as the miners and banks, hence being a lot cheaper now, it appears a level of caution has crept into the investor mindset as Trump’s policies roll out.

It was still a solid day for the banks and miners nonetheless, with a higher oil price driving energy and a higher gold price driving materials. All talk now is as to whether Fortescue Metals ((FMG)) can hit the $7 mark. The stock has run up from under $1.50 a year ago and continues to beat production and sales expectations. Too pricey? Or too successful?

And yesterday saw another former high PE stock come back to earth, although it’s not the first time Ozforex ((OFX)) has taken a hit on a guidance downgrade. That’s probably why the shares fell -24%.

China’s manufacturing sector continued to expand in January. The official PMI came in at 51.3, down from 51.4 in December but ahead of forecasts of 51.2. The official service sector PMI rose to 54.6 from 54.5. Beijing’s plan remains intact – to shift focus from manufacturing and export towards domestic consumption.

We will no doubt now have to endure the annual period of distorted Chinese data, which are impacted every year by the week-long New Year break.

Short and Sweet

No one expected the Fed to raise again in January having raised in December, and so it came to pass. In an unusually brief policy statement, Janet Yellen noted the US economy is growing modestly and inflation is rising gradually. Three rate hikes are still expected this year but not just yet.

Which is hardly surprising. The Fed, like everyone else, is waiting to see just what fiscal policies will eventually make it out of the Trump camp, specifically with regard the likes of taxes, tariffs and infrastructure stimulus. If there are to be three rate hikes they would most likely come in the second half of the year, assuming it takes six months to push any radical new policies through Congress.

We now find ourselves in the unusual position of the Fed being background noise, rather than the centre of the universe as it has been for eight years. Last night’s ADP private sector report for January showed the addition of 246,000 jobs – many more than expected. Wall Street shrugged. It will shrug again on Friday night when the official non-farm payrolls number is released.

The US manufacturing PMI rose to 56.0 in January from 54.5 in December to mark its fastest pace of expansion in two years. While again this is good new economically, things will be a lot different for US manufacturers if Trump gets his way. Whether or not that will prove ultimately beneficial is another matter.

The main focus on Wall Street last night was on Apple. Having posted a corker of a result in Tuesday night’s aftermarket, the Dow component’s shares rose 7% last night. Considering the Dow only rose 26 points, it was pretty much Apple on one side of the ledger and everyone else on the other. Apple’s move also led the Nasdaq to outperformance.

So realistically it was a soft session on Wall Street last night, but for one stock.

Facebook has posted in this morning’s aftermarket but has only managed a 2% gain so far.

Commodities

Mineworkers in Chile have voted to reject BHP Billiton’s ((BHP)) new pay deal and unless a resolution is forthcoming, will go on strike. Seems we go through this charade about every couple of years. The copper price has jumped up in anticipation of a strike, so last night actually fell -1% in London.

BHP shares actually rose 0.4% in London. Lead took another -2% beating on the LME last night, while nickel shot up 3%.

Iron ore remains unchanged at US$82.40/t.

The US dollar index has clawed back 0.1% to 99.69 and gold is off a little at US$1207.60/oz.

Are spot Aussie traders all still on holiday? The Aussie is yet again steady as a rock at US$0.7581.

Today

The SPI Overnight closed up 9 points.

Maybe the Aussie traders will come out of the woodwork today when the local trade balance for December is released. A surplus is anticipated, thanks to the commodity price rebound.

Building approvals data are also due today.

The Bank of England will hold a policy meeting tonight.

On the local stock front, earnings results are due from Downer EDI ((DOW)) and Tabcorp ((TAH)).

Rudi will appear on Sky Business today, 12.30-2.30pm.
 

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