Wall Street managed to end the week on a positive note on Friday, with the major equity indexes up between 0.5 per cent on the Dow and 0.9 per cent on the Nasdaq. Not bad considering the US government is still in shutdown mode with no sign of a deal being reached.
So far then, this is the third positive session in about 12, with US markets down about 2 per cent over that period. Fairly modest all considered and there is no sign really anywhere of any safe haven flows, other than cash perhaps, and that’s despite the best attempts of policy makers in the US and abroad to whip up at least some panic. Why they’ve done that I don’t know – reasons vary I’m sure, but they have done it.
US bond yields then finished the week marginally higher, with the 10-year US Treasury yield up 3 bps to 2.64 per cent – and that’s actually down 20 bps or so over the last couple of weeks. Gold is down about $33 for the week to $1309, losing $7.7 of that on Friday night. There wasn’t really too much else of interest for the week otherwise – recall we were to get the US employment numbers, but these were canned due to the shutdown.
Bringing it back home, to the island of stability and comparative sanity that is Australia, the Aussie dollar sits a little higher this morning at 94.44 US cents, while the SPI suggests Aussie stocks will rise 0.6 per cent – although I’m sure volumes will be low given the public holiday in New South Wales.
Otherwise, it’s a little difficult to try and pick the direction for markets at the moment. In terms of the domestic dataflow this week, I actually think the confidence indicators (National Australia Bank’s business survey on Tuesday and Westpac’s consumer survey on Wednesday) are probably the key ones to watch. That’s not to say the unemployment numbers (out Thursday) are unimportant – it’s just that it’s quite clear the main issue afflicting country is (or was) an abnormally low level of confidence.
Two events, at this stage, appear to have brought a turnaround in confidence among business and consumers. Firstly, the ALP is no longer running the country. Secondly, the Reserve Bank’s easing program, which did so much to fan the flames of fear among the citizenry and crush confidence, has slowed. If the board can just wake up to itself and stop targeting the exchange rate, that cycle is perhaps even over.
That the unemployment rate has increased to 5.8 per cent is merely a symptom of our abnormally low confidence, because it’s not like the country isn’t creating jobs – it is. And that fact alone argues against some of the more alarmist economic commentary out there. If we were truly headed toward a downturn, there would be broad-based jobs destruction. That there isn’t is telling, and in any case a 5.8 per cent unemployment rate is still very low.
So back to confidence. The issue is whether the recent rebound we’ve seen is permanent change or a temporary sugar hit, regardless of what caused it. This is why this week’s numbers are so important because it will give us a clue as to which it is. Confidence isn’t something you can forecast – people use it to make forecasts, and I’ve been stunned how low confidence fell and how long it stayed there.
So who knows. But if recent confidence gains can be held this month – i.e. further gains or only modest falls – then that could be representative of a massive change in the nation’s psyche. Much needed, and the implications are obvious: we will avoid a downturn. So depending on what happens over in the US, this could be the most critical focus for the market.
Having said that, payrolls are apparently due out Tuesday night now, I think. I don’t know how certain that is though – same deal if it is, with a strong outcome of 182,000 forecast, though in this environment it is much more likely that result will be spun into something weak. The Fed needs to print money after all.
Otherwise, US factory orders are also due, as are retail sales, on Friday night.
Have a good week…
Adam Carr is a leading market economist.
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