By Greg Peel
The Dow closed down 17 points or 0.1% while the S&P was steady at 1939 and the Nasdaq rose 0.1%.
Looking North
The local market jumped on the BoJ bandwagon from the open yesterday in concert with global markets on Friday night. A 20 basis point cut to the Japanese cash rate to minus 0.1% from plus 0.1% is apparently the stuff of global recovery. The ASX200 was up 68 points at its high.
Whether or not anyone noticed, TD Securities’ monthly inflation gauge released yesterday showed a 0.4% increase at the headline in January to 2.3% annual, despite the plunge in USD oil prices. Core inflation, ex-energy, showed a 0.2% gain to 2.0%. The market remains convinced the RBA will be forced to cut its cash rate again some time later this year, if for no other reason than everyone else, bar the US, is doing it, but on these numbers there’s clearly no rush.
Nor would the state of Australia’s once destitute manufacturing sector provide cause for the RBA to panic. Yesterday’s local manufacturing PMI came in at 51.5. That’s down from 51.9 in December, but represents the seventh month of expansion nonetheless.
But for global markets there’s only one PMI that matters, and that’s China’s. Beijing’s official manufacturing PMI showed a fall to 49.4 from 49.7 to its lowest level in three and a half years. This was sensational news, apparently. At least, it was if you were watching TV news broadcasts last night.
What isn’t sensational news for the popular press – probably because it all starts to get a bit complicated for the great unwashed – is that Beijing’s services PMI came in at 51.4. That’s down from 52.2, so there’s no denying China’s economy is still in slowing mode. But a major reason China’s economy is slowing is because Beijing is trying to transition China from a workshop-to-the-world to a domestic-based consumer of goods and services. To do this, one assumes the Chinese manufacturing sector would need to contract.
The Chinese PMI results took the ASX200’s gain yesterday down to 38 points at the close, from the 68 point peak.
And as an aside, Caixin’s independent measure of Chinese manufacturing PMI came in at 48.2. That’s a faster rate of contraction than the official measure, but actually up from 48.0.
In the wash-up, sector moves for the local market yesterday were relatively uniform with the exception of healthcare. The hospital stocks were down on Friday and bounced back yesterday, sending the sector up 2.8%.
Around the Grounds
Japan’s manufacturing PMI fell to 52.3 from 52.6, but that’s pre rate cut, while the eurozone was disappointing with a fall to 52.3 from 53.2 post the ECB’s stimulus kicker announced in December. The UK was pleasantly surprised with a better than expected 52.9, up from 52.1
Each of the above economies, and Australia, are at least seeing their manufacturing sectors expand. The US result showed improvement, but only to 48.2 from 48.0. The result represents the fourth consecutive month of sector contraction.
Love That Bad News
Which is one reason to assume the Fed will be in no rush to implement its second rate cut in March. Another reason was provided by last night’s release of US personal income and spending numbers.
Consumer spending in December was flat on November, despite incomes rising 0.3%. Savings have reached a three-year high. The personal consumption and expenditure (PCE) measure of inflation fell 0.1% in December to mark 0.6% growth for 2015. The Fed prefers PCE to CPI, and this is the number the FOMC wants to see at 2%.
US inflation has clearly become an issue for Fed vice chairman Stanley Fischer. Fischer was last year among the most hawkish of FOMC members, deriding the market at the time for assuming too slow a pace of Fed rate hikes in 2016. Last night he changed his tune, and admitted the market might be right. Global volatility is weighing on the US economy, and that is slowing the pace of inflation growth from previously assumed levels.
The Dow has opened down 167 points from the bell and was continuing to struggle when Fischer made his comments. By late afternoon the Dow was up 44, before settling down 17.
The initial fall was driven by yet another 6% plunge in the price of oil, which in turn was driven by the awesome power of the Chinese manufacturing PMI. And presumably the market is beginning to concede that co-ordinated OPEC/non-OPEC production cuts are the stuff of fantasy.
But between the data, and Fischer’s interpretation of that data, the outlook for the US economy is clearly weak. And that’s great news.
Meanwhile, despite Snowzilla attacking last month, the forecast in the US is now for a period of winter mildness, unlike the past two winters. Good news? Well not for US natural gas, which fell 6% last night. Kick ‘em when they’re down.
Commodities
West Texas crude is down US$2.13 or 6.4% at US$31.43/bbl while Brent is down US$1.95 or 5.4% at US$34.04/bbl.
Activity on the LME was mixed last night, and once again we are reminded that China shuts down for the New Year break next week and that means a late scramble to buy or sell material and to square up trading positions. So we saw aluminium and copper steady, nickel down 1.5%, lead up 1.5% and tin up 2%.
Iron ore jumped US$1.00 to US$42.50/t. This is likely to set the mining sector on fire today and spark talk of a comeback, but I’d be wary of the aforementioned holiday and its implications.
Weak data and Fedspeak has the US dollar index off 0.6% to 98.99 and gold up US$11.30 to US$1128.30/oz.
The weakness in the greenback has countered any China-related weakness in the Aussie, which is up 0.4% at US$0.7106.
Today
The SPI Overnight closed down one point.
The RBA will meet today and leave its cash rate on hold.
Navitas ((NVT)) will post its earnings result.
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