SCOREBOARD: Divided and directionless

Negative leads from offshore markets and higher Spanish and Italian bond yields don't suggest a good start, but this is a week where key themes will be tested.

I don’t think Friday’s session or events generally last week, will provide much of a guide as to what markets can expect this week. The major indices all dipped on Friday, true to say, so it probably won’t be a good start. For instance, US indices were down almost 0.5 per cent, although in Europe the offer was harder with the Dax down 1 per cent, CaC off 2.5 per cent and FTSE off 0.6 per cent. The concern here is obviously Spain again and their debt yields are pushing higher. On Friday we saw another 13bp or so added on to the 10-year which now sits at 5.97 per cent. Italy’s equivalent was up only a few bp to 5.03 per cent but it was still up.

The thing is there were numerous reasons to expect bonds to rally for that session. The Spanish and French governments for instance announced new austerity measures and then of course, we saw the results of the Spanish bank audit. Turns out they need ‘only’ €53 billion to recapitalise and a new state owned bad bank is also being set up. Now remember Spain has a credit line of €100 billion to help out their banks, and they reckon they may not even end up asking for all of that €53bn. So we’ll see. There is some certainty at least and I thought that would have boosted markets.

Now that negative sentiment could and probably will all carry on through the week – I mean anything could happen in reality – either way. But, added to that, this is going to be one of those weeks where key macro themes are going to be tested. Or could be tested, given the number of tier one macro indicators out this week. Pessimism is rife, but the thing is there is ample scope for this data to surprise on the upside.

For the US, the perception is the economy has either, or is close to stalling, despite the fact that there is no key data to support this view. Of particular importance for the US will be the ISM index, out tonight, and payrolls on Friday. So far, the ISM index has fallen from 53.5 in May to 49.6 in August which is the lowest level we’ve seen since 2009. A number below 50 does indicate that the manufacturing sector is contracting, this is true, but few people realise that for the economy overall, this number is still consistent with trend growth – which of course is what we’re seeing, or just below actually. Annual GDP growth at 2.1 per cent is just below the average of 2.4 per cent. Taking Q2 GDP by itself and annualising it gives 1.3 per cent, which has got some people concerned, although one quarter of data does not indicate a trend. To illustrate this, growth in the previous 2 quarters annualised to 3 per cent, which is above trend, although this wasn’t something noted by most economists.

Now for the manufacturing sector itself, the data is concerning and I certainly don’t dismiss the ISM index, it’s the best in the market. But data is volatile and we have seen a pattern, as in previous years, when the index dips around mid-year only to recover. It is not clear then whether this is just temporary lull or the start of something more sinister. History warns us not to be overly pessimistic though. Recall the declarations from esteemed economists about double dips and stall speed growth over the last few years. Wrong in every case and investors need to have this in mind. Then think about what a stronger number might do. The market is primed for weakness, and any surprises here will have a marked impact.

Similarly, payrolls on Friday (for September) are expected to yield a lift in employment of 135,000, while the unemployment rate is expected to rise to 8.2 per cent from 8.1 per cent. Again the perception is that jobs growth has been weak, and again, this is simply not true. Jobs growth has been strong. Indeed stronger now that prior to the GFC – that’s a fact. The reason the unemployment rate is taking so long to come down is because of the vast numbers of jobs that were lost when the Fed allowed Lehman to collapse – sparking the GFC. It will take time even with strong jobs growth. Recent indicators support positive jobs growth and the risk is, as in past years we get a bounce back.

Otherwise key US data includes construction spending for the month of August tonight. The Fed’s Bernanke speaks on monetary policy. On Wednesday we get the non-manufacturing ISM for September (at 53.7 now) and the ADP employment report. Thursday sees initial jobless claims, factory orders for August and FOMC minutes.

Elsewhere abroad and for the eurozone, we get the August unemployment rate tonight (expected to rise to 11.4 per cent from 11.3 per cent), producer prices on Tuesday, retail sales Wednesday and the ECB’s decision Thursday. Rates are expected to remain unchanged at 0.75 per cent, while no new are measures expected. German factory orders on Friday are also worth watching. Finally for China, we see the manufacturing PMI today at 11 and then on Wednesday we see the non-manufacturing PMI.

For the Aussie market the big event is obviously the RBA meeting tomorrow at 1430. I’ll go into more details at a later point, but suffice to say I don’t think they should be cutting at this meeting. Nevertheless this is the expectation of the market and as of Friday, debt futures were pricing in a 25bp cut. Economists aren’t, however, with 19 of 28 economists suggesting the RBA will remain on hold. The RBA for its part signalled that a cut was being considered and history has shown that it takes very little for them to act on that. So the meeting is certainly ‘live’. But I’ll leave it there for now.

Other than the RBA’s meeting there are a few other releases worth watching. Today we get TD Securities inflation gauge while on Tuesday, and in addition to the RBA’s meeting, we see RP Data-Remark house price series (Sep) at 1000 AEST and then the RBA’s commodity price index (Sep) at 1630 AEST.

Wednesday we see retail sales (August) and trade data (August), while on Thursday Building Approvals (August). The general expectation for this data is that retail sales will rise modestly (0.4 per cent) following a 0.8 per cent fall last month. Approvals are expected to rise nearly 5.5 after a fall of 17 per cent last month.

That’s about the lot, have a great week…

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