Tag Archives: Currencies

article 3 months old

The Overnight Report: Aujourd’hui Je Suis Un Parisien

By Greg Peel

The Dow rose 237 points or 1.4% while the S&P gained 1.5% to 2053 and the Nasdaq added 1.2%.

Resilience

Wall Street was accelerating to the downside when it closed on Friday night and commodity prices were all again mostly lower in that session, ensuring the local market would be under pressure yesterday morning. The Paris attacks added an additional level of expected downside.

But the world, it seems, has become inured to terrorist attacks and no longer reflects global fear through stock market sell-offs. History shows that such terror events initially prompt market sell-offs before recoveries that are swift and solid. This time around the world has decided the initial sell-off is the unnecessary part.

The ASX200 plunged 72 points from the open yesterday. The SPI futures had closed down 37 points on Saturday morning so the balance could be considered the Paris effect, but the index very quickly rebounded.

On a technical basis, the breach of 5000 brought in the buyers at least to some extent, with almost all sectors ultimately finishing in the red. The industrials sector (-1.3%) was one of the hardest hit, as therein lies all manner of companies connected to overseas travel and tourism. But a large part of the rally back to a less ominous close can be attributed to energy (+1.6%). On expectation the war against IS will intensify in the Middle East, buyers were no doubt anticipating a bounce in oil prices.

The index closed right on the pivot point of 5000, waiting to see what might transpire overnight.

Meanwhile Japan released its September quarter GDP result yesterday which showed a 0.8% year on year contraction, confirming that Japan is yet again in technical recession. The June quarter saw 0.7% contraction. While the result is another thorn in the side of Abenomics, and underscores just how significantly Japan’s earlier sales tax increase has hit an economy 60% reliant on consumption, economists are confident the December quarter will provide a bounce-back given improvement in more recent data releases.

Defiance

Tourism represents some 7% of French GDP, and already airlines and travel companies are offering refunds to those having planned trips to France. Fashion and high-end retail are also a major beneficiary of tourists to Paris. The French stock market plunged on the open last night but very quickly recovered to a flat close. Ditto the German market, while the London market fell briefly before rallying 0.5%.

Wall Street never blinked. It was a stumbling start, but buyers came in on a steady trend all session to a solid close. Commentators were surprised, expecting at least some fearful reaction in the country most likely to see terrorist events. The response was made even more surprising by the two steep falls on Thursday and Friday and Friday’s very weak close, which suggested the US indices could be in for more selling this week.

Wall Street also shrugged off another weak reading for manufacturing in the New York Fed region, with the Empire State index coming in at minus 10.7 from minus 11.4 last month when economists had forecast improvement to minus 6.5.

Traders also ignored a stronger US dollar, which is up 0.5% on its index to 99.39 on a typical safe haven trade. The strong greenback is a major factor in US September quarter earnings showing negative growth for the second consecutive quarter and negative revenue growth for the third. The stronger dollar also impacts on commodity prices, and for the US the most important commodity is oil.

Trouble in the Middle East? Oil would typically rally. But then IS has been in operation for some time now and oil prices have been retesting lows. Thus oil prices actually fell on the open on Nymex last night.

Then news came through US air strikes had begun targeting IS oil truck convoys. West Texas crude turned around on the news and rallied strongly, supporting stock indices.

Commodities

West Texas is up US$1.29 or 3.2% at US$42.06/bbl and Brent is up US$1.26 or 2.9% at US$44.87/bbl.

In earlier times one would expect a rally in gold as the haven against all things geopolitical. Those days are gone however, and if anything gold tends to be sold off at times of crisis in order to cover margin calls on plummeting stock positions. But stocks did not plummet and while gold did see some buying earlier on, it is currently flat at US$1081.90/oz.

The stronger greenback provided a headwind, as it did for base metal prices.

Sentiment is already at a low ebb on the LME. The Paris attacks, the stronger greenback, the Japanese recession and a weaker than expected reading on US manufacturing did nothing to brighten the mood last night. Copper was slammed, down 2.2%. Zinc fell 2%, aluminium and nickel fell 1.5% and lead and tin fell 1%.

Iron ore fell US10c to US$47.30/t.

The Aussie is down 0.5% to match the greenback’s rally, at US$0.7093.

Today

The SPI Overnight is up 66 points or 1.3%. We shall overcome.

The minutes of the November RBA meeting are out this morning and economists will be looking for clues, but the meeting pre-dated the astonishing October jobs report.

The US October CPI is out tonight, playing into Fed speculation.

AusNet Services ((AST)) will report interim earnings today while a large number of AGMs will take place across the country, including that of Commonwealth Bank ((CBA)).
 

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article 3 months old

The Monday Report

By Greg Peel

Central Bank Tango

Wall Street was upset on Thursday night that Janet Yellen did not take the opportunity in a speech to provide more clarity on a December Fed rate hike in the wake of the very strong US jobs numbers. So stock markets were sold off on uncertainty and frustration.

But commodity markets are more certain and see a real threat in the dichotomy that is opening up across the globe regarding monetary policy. Commodities are traded in US dollars, and the Fed is set to raise, thus boosting the US dollar. With the exception of the UK, where the BoE is still holding back on a rate rise, every other major economy is looking at further stimulus. The eurozone will extend QE in December, China will continue ongoing stimulus measures and the BoJ is expected to be forced into extending QE anytime soon.

Thus we have the problem of commodity prices falling both on weaker demand from struggling economies, a rising US dollar, and on overriding global oversupply issues.

Falling commodity prices were always going to be the factor for the local resource sectors on Friday and so it was materials fell 2.2% and energy 3.5%. Within those sectors we also have the individual issues of BHP, the tragedy in Brazil and its share price being front page news, and Santos, its balance sheet issues and just what the company is planning to do.

A stronger US dollar means a lower Aussie dollar and that is good news for the Australian economy but not for offshore investors in the near term. If the Fed does start raising then the Aussie is destined to head into the sixties. As US investors lose on the falling currency, they are best to get out now and get back in when the currency has adjusted and yields are even more attractive.

Every sector took a beating on Friday.

Euro Woes

The attacks in Paris were yet to occur when the first estimate of eurozone September quarter GDP was released on Friday night. It showed a slowdown in the pace of growth to 0.3% from 0.4% in June, missing expectations of a steady 0.4%. Year on year growth is 1.2%.

The “miss” was blamed on Germany, which posted the same 0.3% growth when 0.4% was expected. France managed 0.3%, as expected. For major exporter Germany, the slowing Chinese economy is having a significant impact.

Expectations that the ECB will announce an extension to QE in December are already largely baked in, and this GDP result only serves to underscore that assumption. The euro did fall on Friday, pushing the US dollar index up 0.3% to 98.93, and most believe the falls will continue toward parity.

European stock markets were also weaker on Friday night as the whole world adjusts to monetary policy imbalances, but as noted, the terrorist attacks in Paris were yet to come. European markets will have their first chance to respond tonight.

Retail Woes

The problem for the Fed is that the data in the US, outside of jobs, are not looking flash.

Retail sales grew only 0.1% in October when economists had forecast 0.4%. Lower oil prices were a factor, as were a drop-off in auto sale value from the month before, suggesting discounting. Ex of autos and energy, sales rose 0.3%.

Within the sector, the death of bricks & mortar retail continues. In the wake of an earlier poor result from Macy’s, Friday night saw a similarly weak result from JC Penney and a profit warning from Nordstrom, sending both share prices down 15% each.

US producer prices fell 0.4% in October when a 0.3% gain was expected. The core PPI, ex of food & energy, fell 0.1%.

Looking at these numbers in isolation, one would not be expecting the central bank to be considering tightening policy. Yet in contrast, the Michigan Uni fortnightly consumer sentiment index showed a rise to 93.1 from a previous 90.0.

Retail and resources led Wall Street lower on Friday night, in a continuation of the US dollar-related selling across the week. The Dow fell 202 points or 1.2% while the S&P lost 1.1% to 2023 and the Nasdaq fell 1.5%.

The broad market S&P500 has broken down through its 200-day moving average – a bearish signal – as Wall Street posted its worst week since early September. The S&P is now back to being down for the year.

Commodities

On Friday night the International Energy Agency published a forecast for global oil demand growth of 1.2m barrels per day in 2016, down from the 1.8mbpd run rate for 2015 to date. This year’s demand growth actually represents a five-year high, which just goes to show the impact of oversupply.

On that note, the US rig count rose by 2 last week, to 574. Doesn’t seem earth-shattering, but it is the first time in eleven weeks the count had risen rather than fallen. With oil markets already suffering weakness, it was no surprise that Friday night saw West Texas fall another US92c to US$40.77/bbl and Brent fall US66c to US$43.61/bbl.

WTI’s 8% price fall over the week is the biggest since March.

The LME opened on Friday night with yet more selling. If Chinese weakness and prospects of a rising US dollar aren’t enough, weak US retail sales and inflation numbers didn’t help either. But base metal prices have fallen low enough for some to start risking the contrarian trade. Prices recovered from session lows by the end of the day. Aluminium, copper and lead still closed mildly weaker but nickel, tin and zinc posted modest gains.

The slight tick-up in the iron ore price on Thursday night proved but a blip. Iron ore fell US40c to US$47.40/t on Friday night.

Gold was relatively steady at US$1182.50/oz.

The Aussie was also steady at US$0.7125 on Saturday morning.

The SPI Overnight closed down 37 points or 0.7% on Saturday morning.

The Week Ahead

Then came Paris.

The G20 leaders may be steeling their resolve in Turkey but the next 24 hours will indicate just what dent to global confidence the attacks will precipitate. On the 37-point SPI fall alone pre-attacks, the ASX200 will be looking closely at the psychological 5000 support level.

Japan will release its September quarter GDP result today. The Bank of Japan will hold a policy meeting on Thursday and the world is still assuming an extension to QE must be a possibility as a counter to Europe and China, with a Fed rate hike being the swing factor.

The US will see the Empire State activity index tonight, housing sentiment and industrial production tomorrow night, and housing starts on Wednesday. The minutes of the October Fed meeting will also be closely scrutinised on Wednesday, ahead of the Philadelphia Fed activity index and Conference Board leading economic index on Thursday.

Australia sees vehicle sales today followed by the minutes of the Cup Day RBA meeting tomorrow. At that point the ridiculously strong October jobs numbers were yet to be released.

On Wednesday the September quarter wage price index will be released, commencing the countdown to our own GDP result due in early December.

The AGM season sees a second big wave this week, with meetings to be held by the likes of Commonwealth Bank ((CBA)) and a shell-shocked BHP Billiton ((BHP)), along with a struggling Myer ((MYR)) and a whole lot of others to boot.

AusNet Services ((AST)) will report interim earnings tomorrow, Orica ((ORI)) releases full-year earnings on Wednesday followed by interims for James Hardie ((JHX)) and Programmed Maintenance ((PRG)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon and again between 7-8pm for the Switzer Report, and potentially again on Friday's Your Money, Your Call - Bonds (not confirmed as yet).
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Clueless

By Greg Peel

The Dow fell 254 points or 1.4% while the S&P lost 1.4% to 2045 and the Nasdaq dropped 1.2%.

Seriously?

There are lies, damned lies and statistics. Economists are not quite sure which category yesterday’s local October jobs numbers fit into.

“While a positive update on the labour market is welcomed,” said ANZ, “we are very cautious about taking this month’s number at face value”.

“We are always wary of reading too much into the monthly labour force ‘lottery’,” said Westpac, “but even looking through the noise it’s hard not to conclude that current labour market conditions in Australia are strong”.

“Believe it or not,” said CBA.

The ABS suggests 58,600 new jobs were added last month, which would make it one of the biggest monthly job increases since Federation. Economists are being polite, but really the mood is one of this result being about as likely as a rank outsider winning the Melbourne Cup with a girl in the saddle.

Oh wait…

CBA puts forward a largely consensus view that this big jump represents a statistical swing following a couple of months of weakness, and that if we smooth out the numbers we’ll find Australia’s job growth trend to running at around 17k-20k per month. The unemployment rate fell to 5.9% in October but CBA expects it to oscillate around the 6% mark for a while yet.

Either that, or five minutes into the job Scott Morrison has proven to be an absolute genius.

Skittish forex traders are always prepared to take anything at face value, nonetheless. The Aussie is up 0.9% at US$0.7125 on the assumption any notion of another RBA rate cut was put to the sword yesterday. They could just as quickly change their minds tomorrow.

Yesterday’s flat close for the ASX200 also reflected the same assumption. Utilities, telcos and consumer staples – all yield stocks – finished in the red. The banks were up because although they are yield stocks, banks benefit from rising rates. Elsewhere it was a bad day for resources, with energy capitulating 3.2% and materials down 1.1%.

The story for those two sectors did not get any better overnight.

Commodities

ECB president Mario Draghi last night told the European parliament he did not see eurozone inflation recovering to the central bank’s target zone in the time previously assumed. Markets took this comment as code for “We will be extending QE in December”.

By rights such a comment should spark weakness in the euro, but the euro has already largely adjusted for such an expectation and last night no less than five Fedheads were providing their two bob’s worth across the Pond. Of the five, two were hawkish, two were dovish and one said nothing at all about a December rate hike or otherwise.

That was Janet Yellen. Is it any wonder Wall Street is in a pique of frustration over a central bank that publically spouts disagreement or clams up when the world is expecting some guidance? The lack of commentary from Yellen was taken by the market as a sign that perhaps there won’t be a rate rise in December. At every other public outing recently, Yellen has reiterated her expectation of a rate rise “this year”.

Thus the US dollar index pulled back a bit last night, down 0.3% to 98.65. But whatever the timing of said rate rise, commodity markets know it will eventually come. They also know the ECB will ease further. Put the two together and they both mean a strong US dollar ahead, and that means that without any noticeable pick-up in global demand, commodity prices must go lower.

Zinc fell 1% on the LME last night, aluminium, copper and tin all fell around 1.5% and nickel fell 3%.

Iron ore actually rose US10c to US$47.80/t. There is likely some support being offered by the tragedy in Brazil and subsequent loss of production.

West Texas crude fell US$1.39 or 3.2% to US$41.69/bbl and Brent fell US$1.65 or 3.6% to US$44.27/bbl.

Gold has already taken the hit, so it’s only down another dollar to US$1083.50/oz.

Stay Out

Weakness in commodity prices, particularly oil, was a major driving force behind Wall Street’s fall last night. But so was the Fed.

Many a commentator has been perplexed of late as to why Wall Street has been going either up or down on rate rise/no rate rise speculation of late and simply not being consistent. Is good news bad news or is good news good news? The answer seems to be different each time.

The real answer is that Wall Street simply does not care about a paltry 25 bip hike. Good God Almighty, can they just make up their minds and end the uncertainty. Uncertainty is the enemy of stock markets. Commodities aside, that is why the Dow fell 250 points last night.

Today

The SPI Overnight closed down 69 points or 1.3%.

The eurozone will see a first estimate of September quarter GDP tonight.

Retail sales will be the major release in the US, along with consumer sentiment and the PPI.

Spare a thought for Santa, who one minute is packing all the presents in the sleigh and the next minute is taking them out again.

The original “Santa Rally”, when first coined, referred specifically to a tendency for Wall Street to rally after Christmas Day and into the new year. These days the Santa Rally seems to have been extended to begin in November. We’re certainly not getting one right now, but will we get one at all this year?

We recall that 2013 was a year in which Wall Street spent the whole time agonising over Fed tapering – when it would begin. Sound familiar? Many a commentator suggested in 2013 that the then long awaited Wall Street correction would surely come the day the Fed announced a start date.

Commentators have spent all of 2015 suggesting a correction would come when the Fed announced its first rate hike, but we had a correction anyway. The day in December 2013 when the Fed announced the commencement of tapering, Wall Street initially fell. The next day it started rocketing, and did not stop until early 2015.

Santa no doubt has a big circle around December 16 on his calendar. Let us only hope the Fed brings the egg nog.
 

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Armistice

By Greg Peel

The Dow closed down 55 points or 0.3% while the S&P fell 0.3% to 2075 and the Nasdaq lost 0.2%.

Confident

The local market opened yesterday on news Australian consumers are feeling rather confident. Westpac’s consumer confidence index for November showed a 3.9% lift to 101.7, the highest level since May.

Within the components of the index, the biggest rise came from expected economic conditions in the next five years. Is this the so-called Turnbull Factor at play? The weakest result was in family finances compared to a year ago, but this is likely the impact of the banks’ out-of-cycle mortgage rate increases.

Whatever the case, retailers will be relieved to know confidence is on the optimistic side of the ledger as we head into Christmas. The most relevant sector here is consumer discretionary, which we recall on Tuesday fell heavily following the apparent tip-over of housing finance growth numbers. Consumer discretionary was up 0.6% on the session but this was not a stand-out result, merely in line with the overall index movement.

It was a very choppy session on Bridge Street yesterday, highlighting indecision amongst investors as we head towards the summer break. Twice the index rallied before turning tail and threatening to go negative, until finally the buyers won on the day. The BHP factor still hangs over the materials sector, which was down 1%, but otherwise all other sectors posted roughly similar gains.

It should have been a session in which China’s monthly data dump played a part, but for some reason Beijing decided it would release those numbers not at midday, our time, as has always been the case, but at 4.30pm, after Bridge Street’s closing bell.

Tentative Signs

China’s October industrial production showed 5.6% year on year growth, down from 5.7% in September and missing expectations of 5.8%. Fixed asset investment rose 10.2% year to date, in line with September but below 10.3% forecasts.

That was the bad news, before a backdrop of Beijing’s stimulus measures to date.

The good news was 11.0% growth in retail sales, up from 10.9% in September and marking the fastest pace of growth since December 2014. It is no secret China’s industrial sector is still struggling from overcapacity that Beijing seems reluctant to address, but given Beijing’s goal of swinging the Chinese economy around into one of consumption, this retail sales number seems a positive step down that path.

Further evidence of the rise of the Chinese consumer was provided yesterday by much talked about “Singles Day” – a reference to the date, 11/11. Singles Day is an online shopping spree along the lines of Cyber Monday in the US when online retailers offer discounts on their products and shoppers go nuts. It was introduced by Alibaba, China’s eBay, in 2009, and the closest thing we can compare it to in Australia is the bricks & mortar Boxing Day frenzy.

Singles Day turned over US$14bn yesterday, up from US$9bn last year.

Thin

By contrast, US department store icon Macy’s posted its quarterly earnings result last night and missed on the revenue line, resulting in a 14% share price shellacking. The company blamed the strong US dollar for lower sales to tourists and an unseasonably warm autumn crimping winter-wear sales, but failed to acknowledge the slow demise of the bricks & mortar department store globally.

There is little likelihood the digital age will usher in the death of beer, so the positive news on the night was an agreement between Anheuser-Busch InBev and SABMiller, two of the world’s biggest brewers, to merge, no doubt pending approval from relevant competition regulators.

These were about the only talking points last night in a session where US banks and the bond market were closed for Veterans Day and stock and commodity market attendance became optional. There were no data releases to speak of, volumes were thin, and without any particular incentive at present, the indices drifted lower. Mostly on lack of interest.

Commodities

Oil markets are “surprised” every week by weekly US inventory data, and I think John D. Rockefeller was the last person to actually make a correct forecast. But last night two separate surveys had the oil markets expecting a 500,000 barrel increase in US crude supplies or a 1.1m barrel increase, so when the number came in at 6.3m barrels the only way for oil prices to go was down.

West Texas is down US$1.15 or 2.6% at US$43.08/bbl and Brent is down US$1.59 or 3.4% at US$45.92/bbl.

The oils fell despite some respite from the US dollar, which has pulled back 0.3% to 98.95 on its index.

The weaker dollar was welcomed on the LME, which was otherwise disappointed in the weak Chinese industrial production and fixed asset investment numbers. The market remains very short, so gains were actually seen in all bar lead, while zinc recovered a percent having fallen two percent the night before.

Iron ore is again unchanged at US$47.70/t.

A combination of the strong local consumer confidence numbers and a weaker greenback has the Aussie up 0.5% at US$0.7060.

Today

The SPI Overnight closed down 17 points or 0.3%.

The local October job numbers are out today, providing the first opportunity for new treasurer Scott Morrison to test out his spin credentials.

Amidst another flurry of AGMs, Graincorp ((GNC)) will release its full year result.

Rudi will make his weekly appearance on Sky Business, Lunch Money, noon-1pm.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

The Overnight Report: Deliberation

By Greg Peel

The Dow closed up 27 points or 0.2% while the S&P gained 0.2% to 2081 and the Nasdaq fell 0.2%.

House of Cards

Much has been made in the popular press of the OECD’s downgrade of its forecast GDP growth rate for Australia in 2016 to 2.6% from a previous 3.0%, reflecting slower Chinese growth. The reality is that organisations such as the OECD, IMF and World Bank tend to run a good six months behind the curve. Last week the RBA tightened its own forecast for FY16 to 2.25% from an earlier forecast band of 2.0-3.0%, and tightened its FY17 band to 2.75-3.75% from an earlier 2.5-4.0%.

Give it another six months and the OECD might catch up. Local economists are constantly reviewing their forecasts so the bottom line is yesterday’s OECD numbers would have had little impact on the market.

Critical to Australia’s GDP growth, ahead of the impact of the lower Aussie dollar finally flowing through to benefit non-mining sectors of the economy, is the housing construction boom. It alone has kept Australia out of recession over the past two years as mining investment and commodity prices have collapsed. Therefore yesterday’s housing finance numbers were something the market did pay close attention too.

The value of housing loans fell by 1.6% in September, to a lower annual rate of 12.4% growth. Owner occupier loans rose by 3.0% to be up 23.1% but the critical segment of investor loans fell by a whopping 8.5% to turn negative annually at minus 2.1%.

The party is over.

It is easy to point to tighter regulatory controls on investment lending, implemented by APRA, encouraged by the RBA and responded to by the banks with mortgage repricing, as the reason behind the peak in Australia’s investment housing boom. But realistically the tide was already turning, given property prices have been running away but rents have not been keeping pace. Mortgage repricing was just the straw that broke the camel.

Negative gearing might be the Holy Grail in Australia but it’s called “negative” because it simply means losing money. As the gap from rental yield to debt servicing obligation widens, the capital value increase required on the property to recover that negative cash flow becomes unrealistic. Either rents must rise (can you see the Chinese coming in and renting everything in Sydney?) or debt costs must fall (currently at historic lows, banks now in tightening cycle) or the investment is not economically viable at the price.

It is telling that the worst performing sector on the local market yesterday (outside a 2% fall for tiny info tech) was consumer discretionary, down 0.9%. The banks also came in for punishment, down 0.6%. The ASX200 did manage to stage a solid comeback on late buying, having been down 72 points mid-afternoon to close down only 20, but most of that buying was seen in the beaten-down resource, telco and consumer staples sectors. Consumer discretionary has very close links to Australia’s housing market.

It was a bumpy ride for the index yesterday, punctuated by the midday release of China’s October CPI. It fell to 1.3% annual from 1.6% in September, which had fallen from 2.0% in August. That’s bad news, but good news if bad news implies expectations of more concerted stimulus measures from Beijing. Bridge Street struggled to make up its mind over the implications, evidenced in index rocking and rolling through the afternoon but at least one big buy order late in the day reflected a mind made up.

The actual good news is Australian businesses otherwise believe conditions are very positive at present, thanks to low interest rates and a lower currency. NAB’s October business survey showed the conditions index steady at plus 9 – well above the long-run average of plus 1 and the best reading since the GFC. Confidence fell from the long-run average of plus 5 seen in September to plus 2.

Interestingly, the survey was conducted in the final week of October when substantial profit warnings were being issued by the likes of Dick Smith and Woolies, and the banks were posting disappointing earnings results and guidance. Home sales data was also released showing the first drop in however long. No wonder confidence was dented.

Yesterday’s late rally, which took us from an onerous looking 5050 back to a 5100 close, may indicate a willingness from buyers to pick up stocks above the 5000 level, but we’ve seen this movie before. Further weakness, and a drop through 5000, can take us down fast.

Whole lotta not much

There was not a lot going on on Wall Street last night beyond a few micro-specific issues. Traders are still trying to figure out if a December Fed rate hike is good or bad.

Lacking anything much else to focus on, traders were glued to the gripping saga that was McDonalds’ investor day. How is the all-day breakfast going? OMG, they’re going to change the recipe for the Egg McMuffin. (How does one fiddle an egg, and a muffin?) And they’re not going to spin off McDonalds’ property portfolio into a REIT, a la Woolies and Bunnings for example, downunder. Mickey D’s stock price went up and down all day with each new revelation.

Just goes to show what a lacklustre session it was. The other news was that Apple component suppliers were experiencing a slowing in demand. Apple shares thus kept a lid on the indices, despite this hardly being a surprise given aficionados always barrel in on Day One to buy new iThings, and sales always slow thereafter.

Tonight is promising to be even more lacklustre on The Street, given the Veterans Day quasi-holiday has US banks and the bond market closed and stock and commodity markets open.

Commodities

A technical breach was blamed for a sudden 2% price fall for zinc on the LME last night, while otherwise base metal movements were mixed and small. Copper fell half a percent and tin rose a percent.

Iron ore was unchanged at US$47.70/t.

The oils are both up US28c, to US$44.22/bbl for West Texas and to US$47.51/bbl for Brent.

The US dollar index is up 0.3% at 99.26 so gold is US$2.90 lower at US$1087.80/oz.

The Aussie is down 0.4% at US$0.7023, reflecting those weak housing loan numbers.

Today  

The SPI Overnight closed up 3 points.

Westpac’s local consumer confidence survey is out today but around midday we will see Chinese industrial production, retail sales and fixed asset production numbers for October, which will likely determine the direction of afternoon trade.

As noted, it’s a quasi-holiday in the US tonight.

On the local stock front, there are quite a few AGMs booked in for today while DuluxGroup ((DLX)) will report full-year earnings and Westpac ((WBC)) goes ex.
 

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article 3 months old

The Overnight Report: Rough Take-Off

By Greg Peel

The Dow closed down 179 points or 1.0% while the S&P fell 1.0% to 2078 and the Nasdaq fell 1.0%.

Tragedy

A dismal day on the local stock exchange was led out by BHP Billiton, which posted a 5.6% drop on news of a fatal disaster at a BHP-Vale-owned iron ore mine in Brazil. Early estimates suggest the mine may be closed for several years and cost US$1bn in clean-up and legal costs.

It was never set to be a good day for the materials sector anyway, as evidenced by falls in iron ore mining stocks across the board. The weekend’s Chinese trade data showed a big fall in imports in general and iron ore imports in particular. To date the sector has seemed not too concerned over the gradual fall in the iron ore price to below US$50/t as this has been largely anticipated and costs have been cut in preparation. But the weak Chinese numbers have crystallised the reality. The materials sector fell 3.7% yesterday.

The energy sector saw a 2.5% fall but elsewhere across the index, the other concern is that of rising US interest rates. Friday’s strong US jobs number has led to expectations the Fed will definitely raise in December, and attention now turns to just how fast the pace of subsequent hikes will be.

For years the Australian stock market has largely been a story of yield, given the fall in commodity prices. The banks, telco and utilities and any stock paying a solid dividend have been supported by those seeking a return in a low interest rate environment. Rates don’t get much lower than zero, hence Australian stocks have been very attractive to US investors. As the interest rate differential between Australia and the US begins to narrow, that attraction is incrementally eroded.

Yesterday saw the banks and telcos each down 1.6% and utilities down 2.2%. Only one sector managed to close flat on the session and that’s healthcare – defensive more so from its undeniable growth story than from its yield.

A US rate rise also alleviates some of the pressure on the RBA to cut its own rate, given the subsequent impact on the Aussie dollar, which will disappoint those sweating on further RBA support.

The ASX200 was technically damaged yesterday. The close below 5140 and the promise of further weakness today suggests, on the charts, that 4700 is the next target.

Adjustment Period

History tells us that a period of “normalisation” – lifting rates back to more normal levels – following a period of easing is typically accompanied by a stock market rally over the first four rate hikes. While normalisation implies the winding down of central bank support, that winding down is an indication the economy is growing again and, in normal circumstances, that is good for a stock market. But that does not mean the initial adjustment is not a difficult one.

It has been over ten years since the Fed commenced a tightening cycle – 2004, following the tech wreck and 9/11. Many commentators have alluded to the fact that not only is there a large cohort of younger market participants who can’t conceive that “social media” used to mean one landline telephone on the hall table, and who can’t read analogue time, they have never experienced a rate rise. Thus if the first move in a tightening cycle requires a bumpy period of portfolio adjustment and a rethinking of strategies, this time around that adjustment may be even more bumpy.

Throw in the fact that the UK is still hesitating on a wind-back of its QE program, Japan may yet increase its QE program, the eurozone is certain to extend its QE program in December, and China is all but certain to enact further stimulus measures, including a potential further devaluation of the renminbi, and there is only one way the US dollar can go.

The stronger US dollar is already impacting on large US multinationals, as this latest round of earnings reports confirms. The US manufacturing sector had been managing to get back on its feet post GFC but it is now faced with less competitive pricing power. In short, a Fed rate rise may imply a stronger US economy but a surging US dollar means the economy is dragging a heavy weight along with it.

Wall Street was somewhat stunned on Friday night by the shock jobs number, and its implications. With the weekend to think about it (and throw in the weak Chinese data), last night saw the Dow fall by as many as 243 points by midday. The combination of the stronger dollar (albeit last night the dollar index came back off a tad to 98.96) and further signs of weak Chinese demand sent all commodity prices lower again.

Stocks have managed to regain some ground to the close, falling an even 1% across the major indices. The S&P500 has broken support at 2100.

Santa? Please phone home.

There had been talk, in the wake of Wall Street’s 8% rebound out of the August depths, back to the level from which it had fallen, that perhaps this year the Santa rally came early. That rally was aided by a return to stability in Chinese markets, boosted by ECB QE, and confirmed by two weak US jobs reports for August and September that left Wall Street certain the Fed would not be raising in 2015.

Now that all has to be rethought. Once the difficult adjustment period is over, perhaps then can Santa hop back on the sleigh.

Commodities

The US dollar index was slightly lower last night but the weak Chinese trade data ensured falls across the board on the LME. Aluminium, lead, nickel and zinc were all down over 1% while copper and tin posted smaller falls.

A sad reality of the tragedy in Brazil is that prolonged closure of the mine reduces global iron ore supply, and hence is supportive for the iron ore price. Iron ore is up US30c to US$47.70/t.

Weakness in oil prices continued, with West Texas down US49c to US$43.94/bbl and Brent down US37c to US$47.23/bbl.

There was some respite for gold thanks to the dip in the greenback. It’s up US$3.40 to US$1090.70/oz.

The Aussie is relatively steady at US$0.7052.

Today

The SPI Overnight is down 52 points or 1.0%. If accurate this implies a fall through 5100 for the ASX200 and a move towards tenuous support at 5000.

Australian housing finance data – a hot topic at present – will be released today. NAB will publish its October business confidence survey.

Beijing will post China’s October inflation numbers later today.

The local market will see earnings reports from Incitec Pivot ((IPL)) and Eclipx ((ECX)).
 

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article 3 months old

The Monday Report

By Greg Peel

Struggling for support

Last week on Bridge Street was a week in which the ASX200 opened to the downside, before bouncing off 5150 and rallying strongly to 5300. That wasn’t to last, and down we came again, culminating on Friday in an early fall back to 5150.

Energy led the selling on the day, closing down 1.2%, while materials and the telco closed slightly weaker. But a recovery rally from mid-morning saw all other sectors finish in the green. Last week the index found support at the previous breakout level of 5200 but now it appears the number is 5150.

Friday was also a day of squaring up positions ahead of the weekend release of the US jobs report and Chinese trade data.

Job Shock

August was a shock, September was an even bigger shock, but nothing had prepared Wall Street for the shock to come in the October non-farm payrolls result. The difference was it was a shock to the upside. The US added 271,000 jobs in the month, some 100,000 more than consensus forecasts.

That’s the biggest increase in 2015 to date. The US unemployment rate fell to 5.0% from 5.1% in September, its lowest level since April 2008. But the big news was a sudden jump in wage growth to an annual rate of 2.5%. That’s the fastest pace since July 2009.

It is that number which now has Wall Street locking in a December rate hike from the Fed. The Fed appears to be itching for an excuse, and would have been rocked by the criticism it received for not raising in September. There is still the November jobs report to come, and October’s number may yet to subject to revision, but the futures market now has a December hike at a 70% chance.

The US dollar index jumped 1.3% to 99.17 on Friday night, so forex markets are pricing in a rate hike. Ditto the US bond market, where the ten-year yield rose 9 basis points to 2.33%.

As for the US stock market, well, confusion still reigns apparently. Not about whether or not the Fed will raise but about whether that’s a good or bad thing. The Dow closed up 46 points or 0.3% on Friday night and the Nasdaq was up 0.4%, but the broad market S&P was flat at 2099.

We recall that when the Fed did not raise in September, Wall Street fell sharply. Not because the market necessarily wanted to see a rate hike but because it simply wanted to end the uncertainty. Then when we saw two consecutive jobs reports that were shockingly bad, Wall Street decided it was now certain the Fed would not raise, and thus started buying on the basis of ongoing easy policy.

By rights thus, Friday’s jobs number should have had Wall Street selling again. But it didn’t. Why not? Probably because Wall Street would still just like to see this damned rate rise debate over and done with so we can move on. And at the end of the day, a good jobs report is economically positive. Thus there was a level of trade-off, and the best the S&P500 could do was nothing.

China Woes

There’s still not a lot of economic positivity coming out of China.

Yesterday’s October trade data from Beijing showed a 6.9% year on year decline in exports, down from -3.7% in September, and an 18.8% fall in imports – better than September’s -20.4% but still pretty bad. Within Beijing’s initial 7% GDP growth forecast for 2015 was a growth forecast for trade of 6%. Year to date trade is down 8%.

That’s in dollar terms, it must be noted, and so also reflects the big falls in commodity prices. Indeed by volume, imports fell only 2.6% in October. However raw materials were the hardest hit segment within that number, such that by volume, iron ore imports fell 12.3% and coal 21.4%.

The good news, if we can call it that, is that commodity prices really tanked towards the end of 2014. Thus the year on year numbers China will cycle from now should not look quite so bad.

Commodities

The Chinese trade release was yet to come when commodity markets closed for the week on Friday night, so it was all about US jobs and the big jump in the US dollar. In the end, nevertheless, falls were not that dramatic.

Base metal prices have been weak for some time on a slower Chinese economy and the prospect of a Fed rate rise, so the market has been well shorted. Copper fell 0.6% on the LME on Friday and nickel 1%, but the other metals were flat to higher and beaten-down aluminium posted a 1.3% gain.

The story is not dissimilar for the oils, although an US80c fall for West Texas to US$44.43/bbl again puts the benchmark below the long-running 45-50 range. Brent fell US37c to US$47.60/bbl. There was other news to consider for the oil markets nonetheless.

President Obama announced on Friday night the proposed Keystone pipeline from Canada all the way to US refineries on the Gulf would not be built due to environmental concerns. It is a blow to Big Oil’s hopes of creating a major US oil exporting industry. Aside from environmental issues, the question of America’s energy security is a consideration, as is the desire to keep domestic energy prices contained.

Coming back to the US dollar impact on commodity prices on Friday, the big loser was gold. It fell US$17.40 to US$1087.40/oz.

The Aussie dollar was the other big “loser”, falling 1.3% to US$0.7047.

And the iron ore price is down yet again, by US30c to US$47.40/t.

The SPI Overnight closed down 25 points or 0.5% on Saturday morning, ahead of yesterday’s Chinese data release. If the Fed is indeed going to start raising US rates, Australia’s yield plays start to become less attractive to US investors, and the RBA is under less pressure to cut its own rate.

The Week Ahead

China’s October data will continue to roll in this week. Tomorrow sees inflation data and Wednesday sees industrial production, retail sales and fixed asset investment.

It’s a quiet week for US data until Friday, and on Wednesday the Veterans Day holiday sees US banks and the bond market closed while stock and commodity markets remain open, albeit with lower volumes. Friday sees the PPI, retail sales, inventories and fortnightly consumer sentiment.

The eurozone will provide its first estimate of September quarter GDP on Friday.

In Australia, today brings the ANZ job ads series and tomorrow NAB’s business confidence survey along with housing finance data. Wednesday it's Westpac’s consumer confidence survey and on Thursday our own October jobs numbers.

After a brief dip in activity, the local AGM season starts to hot up again this week ahead of a rush towards the end of November.

On top of the AGMs, Incitec Pivot ((IPL)) will release full-year earnings tomorrow followed by DuluxGroup ((DLX)) on Wednesday and Graincorp ((GNC)) on Thursday.

Rudi will appear on Sky Business on Thursday at noon.
 

For further global economic release dates and local company events please refer to the FNArena Calendar.

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article 3 months old

The Overnight Report: Waiting For Jobs

By Greg Peel

The Dow closed down 4 points while the S&P lost 0.1% to 2099 and the Nasdaq lost 0.3%.

Banked

Commonwealth Bank released its quarterly earnings report yesterday just as RBA governor prepared to warn bank shareholders at that upcoming global banking regulation is a “juggernaut” that is still growing in strength, threatening to undermine future bank returns. If the market thought this recent round of big bank capital raisings is the end of it, it is possibly in for disappointment.

Critical to bank capital requirements is the potential loss of the capacity to internally model loan book risk and set appropriate capital weightings, which seem set to be determined by international regulations. Locally, clarity is being sought on the Financial Systems Inquiry’s vague suggestion that the banks should be “unquestionably strong”.

It was not a good day for the banking sector yesterday, down 1.3%, albeit NAB went ex. The consumer sectors also fell over 1%, likely on a kick-on from Wednesday’s uninspiring retail sales numbers and a shrugging off by Glenn Stevens in his Melbourne speech of any need for the RBA to counter bank mortgage repricing with rate cuts. Meanwhile, the materials sector  (down 1.0%) is beginning to fear iron ore is not going to rise above US$50/t again.

Yesterday’s sharp sell-off for the ASX200 began from the bell and accelerated as the index again passed back through the 5200 support level, before a bit of late buying righted the ship just a little. The index still closed under support at 5193, suggesting “support” is rapidly becoming the wrong word to use. Wednesday’s failed rally was enough to keep buyers in their boxes for the most part.

Booked

In contrast to the RBA’s reluctance to cut rates at this stage, across the ocean the story is a different one with the Fed still trying to prepare the market, it would appear, for a December hike. Critical to that decision will be two months of jobs reports prior to the December FOMC meeting, and tonight sees the October numbers.

Wall Street thus all but shut down last night, having rallied back to near previous highs following the China scare of August to once again be poised where it had been when the year began, waiting for direction from the central bank.

With little else going on, last night’s centre of attention was Facebook, which rallied 5% after posting an earnings beat in Wednesday night’s after-market. This took the stock into illustrious company at a market cap of over US$300bn – bigger than General Electric.

CNBC had some interesting stats this morning: In 1995, the three biggest US companies were General Electric, AT&T and ExxonMobil. In 2015 its Apple, then daylight, then more daylight, then Google and Microsoft. Exxon comes in fourth. Facebook’s not far behind.

New world.

Commodities

On Wednesday night the talking point on Wall Street was confirmation by both Fed chair Janet Yellen and New York Fed president William Dudley that a rate rise in December is a “live possibility”. The US dollar subsequently rallied strongly, but most of the action occurred after the LME session had ended. Hence it was last night when metal traders were able to fully respond.

Copper fell 2.3%. Tin also fell over 2% while lead, nickel and zinc fell over 1% and aluminium managed to hold firm.

The US dollar has since held steady at 97.94.

Iron ore fell another US60c to US$47.70/t. How long before we begin seeing consolidation in the iron ore market, a la energy?

Oil prices also continued to slide last night. West Texas fell US$1.26 to US$45.23/bbl and Brent fell US79c to US$47.97/bbl.

Gold is also lower, down $3.20 to US$1104.70/oz.

It appears commodity markets are locking in a December Fed rate hike.

The Aussie is slightly lower at US$0.7142.

Today

The SPI Overnight closed down 11 points or 0.2%.

Now that we’re back below the 5200 mark and looking shaky, 5000 looms once again as support at the bottom of the previous range.

The RBA will release its December quarter Statement on Monetary Policy today, which will be one of the more closely read statements for a while.

Australia’s October construction PMI is out today.

China will release trade data on Sunday but before that, it’s the US jobs report tonight.

More AGMs today, REA Group ((REA)) will provide a quarterly update and ANZ Bank ((ANZ)) goes ex.
 

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article 3 months old

The Overnight Report: A Live Possibility

By Greg Peel

The Dow fell 50 points or 0.3% while the S&P lost 0.4% to 2102 and the Nasdaq closed flat.

Drift Off

The local market behaved yesterday as if it had just had a huge day out at the races and woke up still feeling a little drunk, before the inevitable hangover set in and by the afternoon it was time for a snooze on the couch.

The ASX200 was off to a flyer, well overshooting the small rise anticipated by the overnight futures. But 5300 appears to be the level to trigger selling at the top of this rebound rally, and so it was the index mostly drifted lower as the afternoon wore on and traders just looked forward to getting home for a sleep.

The surprise winner on the day was materials with a 0.9% gain despite iron ore prices now being entrenched under US$50/t, while at present each day seems to be one in which you either buy the telco or sell it and yesterday was a sell-day, with telcos down 1.2%. Other sectors all closed mostly flat.

There was a slight recovery from the drift around midday when Caixin’s take on China’s October service sector PMI showed a rise to a healthy 52.0 from September’s 50.5, implying there may finally be some signs of Beijing’s stimulus measures having an impact. But then the drift began again.

Australia saw a mixed bag of data releases yesterday.

September retail sales saw 0.4% growth, as was forecast, but there was disappointment in a revision of August growth down to 0.4% from a previously reported 0.7%. The annual rate of sales growth in September was 3.7% -- down from 4.5% in August and well below the long run average of 5.2%.

The September trade deficit was lower than expected, with exports rising 3.4% and imports rising 1.7%. Unfortunately the difference came down to higher iron ore prices in the month, and they have since fallen back again. But Queensland LNG is now beginning to contribute to the numbers, with plenty of upside ahead, and the signs are a long awaited recovery in tourism is underway thanks to the currency.

Australia’s service sector PMI fell to 48.9 in October from 52.3 in September, suggesting a flip back into contraction from expansion. Australia’ PMIs are nevertheless notoriously volatile.

All up the data did not really provide a reason to get excited, but the smaller trade deficit is probably another reason for the RBA to hold off for now.

Around the grounds, Japan’s services PMI rose to 52.2 from 51.4, the eurozone rose to 54.1 from 53.7, the UK rose to 54.9 from 53.3, and the US jumped to a surging 59.1 from 56.9.

The global service sector is alive and well, it would seem.

Going Live

The other major US data release of the day was the ADP private sector jobs report for October, which showed the addition of 182,000 jobs. The September ADP number was revised down to 190,000 from 200,000.

The result confirms a belief US jobs growth is now slowing from a more robust pace earlier in the year. Economists are forecasting 177,000 new jobs to be announced in the October non-farm payrolls release tomorrow night, up from 142,000 in September but below the 200,000 plus trend that has prevailed for the bulk of 2015.

The jobs numbers nevertheless took a back seat on Wall Street last night behind Janet Yellen’s testimony before the House Financial Services Committee. In her testimony the Fed chair reiterated that the risk to the US economy posed by slowing growth offshore had now diminished, and hence December will be a “live” meeting as far as a potential rate hike is concerned.

Once again we come down to the rift across Wall Street between those who do believe current US economic growth justifies a rate rise, those who don’t believe a rate rise is justified and thus don’t expect a rise, those who don’t believe it is justified but really hope the Fed just gets it over and done with, and those who do believe it’s justified but assume the Fed will vacillate yet again.

Take your pick. Wall Street’s response last night was to drift lower with a lack of conviction, on smaller volumes than the past two sessions which produced reasonable rallies.

There was a clearer move in the US dollar index nonetheless. Not only was Yellen sounding hawkish last night, Mario Draghi was reiterating his dovishness by defending the ECB’s willingness to extend QE. Both influences mean a lower EURUSD, hence the US dollar index is up 0.8% to 97.92.

Subsequently the Aussie is back down 0.6% to US$0.7152, post the RBA’s on-hold decision.

Commodities

A day after they were up 3.5% on global supply disruptions, oil prices were back down 3% last night on a combination of the stronger greenback and a sixth consecutive rise in weekly US crude inventories. West Texas fell US$1.33 to US$46.49/bbl and Brent fell US$1.79 to US$48.76/bbl.

Only tin managed to rally on the LME in the face of the stronger greenback, up 1%, while lead, nickel and zinc fell 1% and aluminium and copper fell 0.5%.

Iron ore fell another US40c to US$48.30/t.

Gold never stood a chance against the stronger dollar given the current mood, and it fell US$9.40 to US$1107.90/oz.

Today

The SPI Overnight closed down one point.

RBA governor Glenn Stevens will deliver a speech in Melbourne today ahead of tomorrow’s release of the central bank’s quarterly Statement on Monetary Policy.

The Bank of England will hold a policy meeting tonight but nothing exciting is expected.

Commonwealth Bank ((CBA)) will today wrap up the big bank reporting season with its quarterly update and there is once more a handful of AGMs to get through.

National Bank ((NAB)) goes ex today.

Rudi will make his weekly appearance on Sky Business today, Lunch Money, noon-1pm, to return later on Switzer TV, between 7-8pm.
 

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All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

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article 3 months old

Brokers See RBA Cut As Inevitable

-Surprise at RBA's relative optimism
-Forecasts for cuts pushed into 2016
-May hinge on Fed and AUD performance
 

By Eva Brocklehurst

Inflation concerns, or rather a lack of inflation, were seemingly downplayed in the Reserve Bank of Australia's latest statement accompanying its decision to maintain the cash rate at 2.0%.

Growth is flagging and financial conditions have tightened so some brokers were surprised at the lack of action on the part of the central bank this month. The central bank acknowledged Asian trading partner growth had softened and that domestic growth has been below its long-run average for some time.

Morgan Stanley, which construed the September quarter CPI figures as confirmation that demand was weak, acknowledges it was in the minority calling for a rate reduction this month but was surprised by the optimism reflected in the RBA governor's statement.

The central bank's judgement that there are signs of an improvement in economic conditions makes it more dependent on upcoming data, but also leaves its options open, the broker asserts, and the decision increases pressure on the commonwealth government to do more with fiscal policy. On this theme, clarity is sought regarding any stimulus proposals from the government's mid year economic and fiscal outlook (MYEFO), due before year end.

The broker senses the RBA is reluctant to act ahead of any federal mini budget or the US Federal Reserve's meeting on December 17. As a result, Morgan Stanley pushes its forecast for a reduction in the cash rate out to the first quarter of 2016 and retains expectations for a second reduction in the June quarter, to help engineer a soft landing in the housing market.

Macquarie also envisages scope to ease rates and concludes the RBA has a somewhat optimistic outlook. In fact, a delay to any rate reductions suggests a risk the central bank will have to do more next year. The broker's expectation for a rate cut this month was based on a belief the RBA would downgrade its growth and inflation outlook and would have a clear case to offset the increases in borrowing costs from major lenders.

Moreover, the weak CPI and risks of further deflation provide the rationale, given Macquarie observes other major central banks with strengthening economic activity and clear upward inflation trends in their jurisdictions are considering the case for further easing.

Macquarie remain of the view that easing is still likely as the economy has a difficult transition to make, not just with the downswing in mining investment and the hit from lower commodity prices but also because of the closing of the automotive assembly sector from late 2016. The broker also believes the surge in residential dwelling supply at a time of slowing population growth and a tightening in lending practices presents another challenge.

So, what will it take to make the RBA act? Macquarie suspects this could hinge on deterioration in confidence, meaning non-mining capital expenditure is delayed, or a delay in hiking rates by the US Fed, which could push the Australian dollar higher. The upcoming quarterly Statement on Monetary Policy from the RBA and a speech by the governor could shape expectations further over the next week or so, the broker suggests.

Macquarie expects the next move will be a 25 basis point reduction to official rates in February. As a corollary, until the Australian dollar falls to the US60-65c range and remains there for an extended period, Macquarie believes the risk of further policy support from both fiscal and monetary authorities is high.

UBS is a little more upbeat, believing the Australian economy is transitioning better than widely appreciated and may not need further monetary stimulus. In terms of what was new in the RBA commentary, UBS notes the central bank appears more confident in a European recovery and comfortable with the increase in mortgage rates by the major banks. The broker hastens to add that this does not mean the economy needs an increase in the cash rate.

Moreover, renewed easing of rates globally has the potential to push the Australian dollar higher and the case for the RBA lending a hand to support demand may still arise over the next few months. On balance, UBS expects a final rate reduction of 25 basis points in the months ahead, probably after the next CPI is published and after the Australian dollar response to other central bank policy moves is noted.

Goldman Sachs believes the RBA has relied heavily on business surveys which suggest a gradual improvement in conditions is underway and employment growth has been sufficient to stabilise the unemployment rate. The broker finds this unusual as these are backward looking items.

Goldman, citing deteriorating trade balances, risk of severe drought and building approvals trending lower, finds it difficult to identify why, therefore, the RBA has concluded that conditions have improved materially.

This broker, too, will be keen to analyse the policy statement from the RBA to find more evidence for its rising optimism. There remains a chance that the RBA has merely delayed the rate cut until December but Goldman Sachs cannot envisage any benefit in waiting another month, other than to distance the central bank from the recent mortgage rate increases by the retail banks.
 

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