Markets were a little more subdued following the spike in risk appetite the previous session and there really wasn’t too much going on. I suspect gains on Wall Street (S&P 0.3 per cent to 1544, Dow 49 points to 14,302 and Nasdaq flat at 3225) would have been stronger if not for the recent rally, for the simple reason that a jobs report came out last night suggesting further strong jobs gains in February. 198,000 to be exact.
Admittedly the survey, from ADP, is minor and doesn’t generally have a great relationship to payrolls – directionally it’s not bad, but not on magnitude. Still, it’s not pointing to a jobs slump and does support other indicators suggesting ongoing jobs strength. Markets are less frazzled by the US now though, so maybe that’s another reason why the report didn’t give the markets a major boost.
The constant pessimism on the US has been wrong for years and as it turns out, the US economy is quite robust. Well, that’s what the data tells us at least, although there is no shortage of people who like to ignore that and instead to rely on their misunderstanding of debt, assets and balance sheets more generally as well as their gut – their forecasts for weakness. But calls for double dips have come to nothing and in fact the data has been quite strong (accounting for the supposed slump in US defence spending – which, let's be serious, just isn’t going to happen given concerns over China’s rise).
Anyway, the Fed’s Beige Book, which came out last night, was upbeat, noting that "Reports from the twelve Federal Reserve Districts indicated that economic activity generally expanded at a modest to moderate pace since the previous Beige Book” and this seems to be giving stocks a boost into the close, although none of the above is helping commodities. Crude was down 0.4 per cent ($90.44), copper off 0.3 per cent, although gold is up $6 to $1580.
On the forex front, and as best as some may try to play it down, the currency wars heated up after the head of China’s sovereign wealth fund said, in response to a question about steps the Japanese are taking to devalue the yen (I mean to support growth consistent with their price target – nudge, nudge, wink, wink, eh, eh), that "I would hope that this doesn’t do that as a responsible government…treating the neighbours as your garbage bin and starting a currency war would not only be dangerous for others but eventually be bad for yourself".
The shots have already been fired and steps already taken. The Japanese maintain, having already said it was to devalue the yen, that it isn’t about devaluing the yen but taking bold monetary policy steps to end deflation – which will be good for other countries in the region. This is the same ridiculous commentary that the Fed comes up with. Overall China isn’t buying any of it – a policy adviser to the People's Bank of China stated that "The currency war situation is quite severe…China is definitely a victim."
It seems unfortunate that the yen weakened further overnight then, rising to 94.058 from 93.2. Elsewhere it was same-old though – the Australian dollar was off about 30 pips to 1.0243 and the euro was about 70 pips lower to 1.2993, although the British pound was down a big figure to 1.5040 in the lead-up to the Bank of England meeting tonight.
Other than that, US Treasuries sold off a little with the 10-year yield 4 bps higher at 1.94 per cent. The 5-year is then at 0.8 per cent and the 2-year at 0.25 per cent. Aussie futures are down 2-3 ticks with the 3s at 97.14 and the 10s at 96.60.
Turning to yesterday’s GDP figures, they were pretty good – but not great – and show the economy is still growing around trend. The fact is, it’s a growth profile that many countries are striving for – export -led growth. For alarmists, there are some aspects of the report that may give cause for concern, and I can certainly see quite clear evidence of the confidence-destroying effects of the Reserve Bank’s rate cuts. But the fact remains, growth is still around trend, and the exact composition of growth bounces around every quarter.
Don’t forget that alarmists come out every quarter to poo-poo the result. When it's strong, its 'backward-looking', and they note that forecasts suggest a weakening. 'It can’t last' is always the call. When it doesn’t weaken, they grab what they can from quarter to quarter, and if there is any hint of softness in any component, then all of a sudden the data isn’t backward-looking after all. It’s a joke! They’re a joke.
Yeah, domestic demand came off a bit, but what I would highlight is that any perceived weakness in demand – to the extent that it’s not just noise – comes a year after the Reserve Bank cut rates and directly after it panicked and slashed rates mid-year. Moreover, the Australian Bureau of Statistics decided not to publish the numbers for a component that took off nearly 1 per cent from GDP.
Noting that though, I don’t see any reason to worry – there was nothing in the detail that I found concerning and growth remains around trend, bottom line. The good news is that manufacturing seems to be rebounding – the strongest growth in some years – despite the strong Australian dollar.
Looking at the day ahead, the SPI suggests a modest, 7 point lift for Aussie stocks today. Otherwise there is no major data of note for Australia – the monthly trade balance at 1130 AEDT is it.
Tonight the key reports include German factory orders, and the Bank of England and European Central Bank rates decisions (no changes expected). For the US it’s the monthly trade data, initial jobless claims, productivity and consumer credit.
Have a great day…
Adam Carr is a leading market economist.
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