There was no shortage of good news flow last night, and the subsequent rally was strong. In the US, initial jobless claims got the ball rolling, falling by almost 20,000 to 326,000 in the week to July 26 – a five-year low, and much better than the 345,000 expected.
Now this is a huge move, and while the numbers are volatile, the 4-week moving average – which is used to smooth this volatility – is also very low at 340,000. This is still a great result, and following the strong ADP employment report the other night, it’s a signal that there may be some upside to payrolls tonight. The US 10-year bond yield surged as a result, rising 5 bps within about 30 minutes, and stocks spiked on the open too.
A big five-point jump (just shy) in the ISM manufacturing index to 55.4 soon followed, giving stocks and yields another push higher, but by this point most of the gains on the S&P and Dow had been made. The ISM was a great result though, with the production component surging 11 points, new orders up 6 points and employment up by around the same margin as well. The numbers are for July, so it’s a great signal for growth in the second half, which highlights to me why those soft GDP figures aren’t really capturing the moment. They’re not giving an accurate read of the US economy, which has more momentum, I think that’s clear. Whatever the case, the ISM result is a good signal for global growth more generally.
Now in subsequent trading, the 10-year bond yield rose a further 4 bps to sit at 2.71 per cent, with the gain since 1630 AEST about 13 bps. Big moves. Similarly, US stocks closed well into the black – the S&P500 up 1.3 per cent at the bell (1706), the Dow up 134 points (15,634) and the Nasdaq 1.4 per cent higher (3678). These are new records, the S&P5600 about 9 per cent or so above the 2007 peak. By sector, energy stocks were a key outperformer following a 2.6 per cent bounce in crude ($107.3), as were financials and consumer stocks. All sectors were well bid though.
Across the Atlantic, the Europeans had their own good news flow to complement that in the US, and stocks were certainly well bid there. The Dax was up 1.6 per cent, the CaC 1.3 per cent higher, while the FTSE100 rose 0.9 per cent.
Firstly, the European manufacturing PMIs were confirmed in final estimates above 50 – even revised a bit higher, and stand at the highest level in two years. Despite that and some other positive data coming out of the eurozone, Mario Draghi, the head of the European Central Bank, offered no sign of changing the monetary policy course overnight. Rates were held steady, but he reiterated that rates were to be held at or below current levels for an extended period.
Similarly, the Bank of England left rates unchanged and didn’t print more money, and their own manufacturing PMI rose to a two-year high. Add to that some strong earnings reports, or improved earnings, from banks such as Societe Generale, Lloyds etc., and sentiment got a good boost.
That’s really about it. Commodity price action otherwise was a bit more mixed – the global lift in manufacturing indicators helping copper, which rose 1.3 per cent. But then gold and silver were both weaker (moves were small though).
In the forex space, the US dollar is stronger, and so the Australian dollar is about 30 pips lower to 0.8927 and the euro is off 60 pips to 1.3215, while the yen rose to 99.55 from 98.44.
For the Australian market today it should be a good day if the SPI is any guide – that index up 0.8 per cent. Apart from that there isn’t any major data – only producer prices at 1130 AEST – but the market is waiting for US payrolls tonight anyway. The consensus forecast is that payrolls rose 195,000 in July, while the unemployment rate is forecast to fall to 7.5 per cent from 7.6 per cent.
Have a great weekend…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.