Quite a lot happened while we were away enjoying the long weekend. Firstly, the US economy is where it’s all at – jobs growth remains strong! Gains were 175,000 for May and the unemployment rate ‘was essentially unchanged at 7.6 per cent’. The market reaction to that was strong as well.
It looks like markets were less concerned about QE being pulled and focused on the actual strong data - and so stocks on Wall Street were up about 1.3 per cent on Friday night following gains of about a 1 per cent or so on Thursday night. Bond yields surged 10 bps on the US 10-year bond to be at 2.17 per cent and the US dollar pushed modestly higher. For Fridays’ session the euro and British pound were only off about 30-40 pips and the yen went from 97.5 from 97. Gold fell about $30 and crude pushed higher – up $1.30 to $96.
Since then, markets haven’t really done a lot and last night’s session was devoid of any real direction. Fair enough in the equity space given the hard run up over the previous two sessions. A break was in order. But then I think a part of it also comes down to the fact that there is just so much confusion over China. We saw quite a bit of China data over the last few days with weak trade data on the weekend - exports slowed sharply to 1 per cent year-on-year in May from 14.7 per cent and imports to -0.3 per cent from 16.8 per cent - at odds with strong growth in other Chinese stats that we saw yesterday.
So industrial production remains strong, rising 9.2 per cent, retail sales were strong - rising 12 per cent and fixed asset investment was up over 20 per cent for the year. For me, these numbers show just how absurd talk of a Chinese slowing is. But there is a persistence here to talk down China and a lot of investors don’t know what to think.
The end result is that it looks to me that the market has just ignored the China data - both the 'China-is-slowing story' and the 'hang on a minute! 9 per cent production growth is still incredible growth’ story. Probably because it was neither weak enough to justify the alarmists nor strong enough to shut them up - and there wasn’t really a lot else out. So for last night, US equities were flat effectively with the S&P at 1642, the Dow off 9 points to 15,238 and the Nasdaq up 0.1 per cent to 8307.
Bond yields too didn’t do much overnight. The 10-year Treasury note rose a few more bp to 2.21 per cent after Friday’s spike, effectively ignoring ratings agency Standard and Poor’s announcement that it was upgrading the US from a negative credit outlook to stable - citing economic resilience. How far we’ve come from the long dark days of the double dip. They also brushed off comments from St Louis Fed President Bullard who noted that low inflation might just mean the Fed can keep printing for longer than expected. Readers may recall I brought this up a as a high probability some time ago - QE forever people.
As I noted in 2010, the Fed just changes the story and the facts to justify why they can still print money - regardless of what’s actually going on. So when inflation does lift they’ll just make something else up. So for instance there is already talk that higher inflation is actually good policy - and good for you as well. That’s been the script for 5 years why would it change now?
For the domestic market, well you know we are a recession obsessed nation - the Australian dollar remains low as a result then and is little changed at 0.9464, after a brief spike to 0.9629. Our equities today too will likely be lower after moves last night and the ongoing discussion about China.
Otherwise the line-up today includes new home loans at 1130 AEST, alongside NAB’s business survey (confidence and conditions). Confidence is shot at the moment, the mindless obsession with rate cuts and the campaign to lower the dollar taking a terrible toll given the very negative rhetoric required to justify the ongoing need for cuts and a lower dollar. That’s all you read in the press and this does affect people. Obviously there is also the deep unpopularity of the government as a factor as well. We’ll see what the numbers hold.
Looking abroad we see wholesale sales and inventories for the US - and not much else.
Have a good day...
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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