Equity markets had a hard time deciphering the news and data flow last night. On one hand, things are looking up for the global economy and even the International Monetary Fund has apparently switched its view and no longer thinks that growth in the developed world will be constrained and will in fact lead world growth. I wouldn’t go that far myself, but its optimism on the developed world is welcome and as they say, better late than never.
But this is what they are telling everyone at the Group of 20, which is timely as there was a barrage of data overnight and all of it – well, nearly all of it – was positive. The key data is obviously the US employment statistics released last night – we’ve got payrolls on Friday – and these were great. So for instance, the ADP employment report points to another jobs surge of 176,000 in August, and this strong growth number was backed by another dip in jobless claims to 323,000 (from 332,000) in the week to August 31.
Unfortunately every rose has its thorn, and the thorn for the session was a spike in global bond yields. For instance, the US 10-year Treasury note was up 9 bps to sit just below 3 per cent – the highest yield in about two years. But it was the same elsewhere, with German bonds up 10 bps to 2.04 per cent and the UK equivalent up 11 bps to 2.82 per cent. I think it was this spike, and obviously ongoing concerns over Syria, that weighed on equities. The Fed should taper, they should end QE as the US economy was never as bad as feared. That fact alone – decent jobs growth among other things should be great for stocks – but such are the distortions when the US government, through its central bank, is the biggest buyer of its own bonds.
At the bell then, the S&P500 rose 0.1 per cent (1655), the Dow put on a whole 2 points (14,933) while the Nasdaq was 0.3 per cent higher (3658). By sector, energy stocks were a key outperformer, driven by a 1.1 per cent lift in crude ($108.4) which in turn was driven by a fall in crude inventories. According to the Energy Information Administration, inventories fell 1.8 million barrels in the eighth fall in ten weeks as refiners lift production following unplanned shutdowns. Otherwise basic materials and industrials also outperformed with modest gains – all up about 0.3 per cent.
Elsewhere for the price action, the euro was the biggest move of the forex majors, down about 50 pips after the European Central Bank rates decision last night. The bank held rates steady, but ECB chief Mario Draghi was cautious in his assessment and the central bank even reduced its forecast for growth next year slightly to 1 per cent from 1.1 per cent. In doing so, Draghi kept the door open to still lower rates and added that lower rates would be around for “as far as the eye can see”. Elsewhere, forex moves were mute and the Australian dollar is at 0.913, or down about 20 pips from yesterday afternoon (1630 AEST), while the yen is at 100 from 99.79.
There were a few other bits and pieces worth noting. Price-wise, gold was down $22.9 to $1367 and copper did nothing really. But otherwise, and turning to the data, the US services sector accelerated in August, helping to lift those bond yields but not stocks. So the non-manufacturing ISM index rose to 58.6 from 56. Expectations were for a fall to 55, but this result instead is the best result since the index was established in January 2008. On the Downside, US factory orders fell 2.4 per cent in July after a 1.6 per cent lift, while German factory orders also fell 2.7 per cent in July after a 5 per cent surge the month prior.
Finally and for the UK, the Bank of England met and made no changes to policy. About the only interesting thing was that the bank dropped its view that markets were misguided in pricing rates to rise in 2015-16.
So with that out of the way, I’m not sure that we can expect much from our market today. The SPI suggests Aussie stocks will be up around the 0.3 per cent market. There really isn’t any data to speak of and the fact is it’s all about payrolls tonight anyway. Currently, the market looks for an unchanged unemployment rate of 7.4 per cent and a 180,000 gain in payrolls.
Have a great weekend…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.