US stocks sold off last night, nothing serious although moves pretty much offset yesterday’s gains. The fact is the US market is only down about 2 per cent or so from a record high and the fundamentals are still very supportive.
For last night’s session, news and dataflow were light and indeed the only major release concerned US trade data. It showed healthy gains in both exports (1 per cent) and imports (2 per cent), adding further to other tier one data which showed the global economy’s solid momentum. The trade deficit itself was at $40 billion from $37 billion in March.
It’s unlikely we’ll see major moves on the market over the next couple of sessions as traders await US payrolls. Talk is of a Fed tapering of QE, and strong payrolls make it more likely they’ll do so – which is good-bad news. More to the point, and no matter how modest any tapering would actually be, computer algorithms are programmed to sell!
In the interim it’s just noise and last night there were more sellers than buyers. At the close, the S&P was down 0.6 per cent (1631) as was the Nasdaq (3445), while the Dow was off 0.5 per cent (15,177). Commodities were mixed with precious metals weaker – gold off $13 to $1398 and silver off 1 per cent. Copper was then 1 per cent higher and crude up 0.4 per cent ($93.83).
Nothing much otherwise – the 10-year US Treasury yield rose a few bps to 2.15 per cent, and in the forex space the Australian dollar was down about 40 pips or so to 0.9650, the euro up about 20 pips to 1.0380, the British pound little changed at 1.56312 and the yen right on the US-Japanese official target of 100.
So to domestic matters, the GDP inputs that we saw yesterday suggest that public investment slumped in the quarter and this is set to make a substantial detraction to growth in the first quarter. On the flipside, it looks like net exports will make a strong contribution. With all the partials in place it looks like growth in the quarter will be driven by household consumption once again and net export growth.
Business investment, public investment and inventories are set to detract from growth and realistically that means there is some decent downside risk to the consensus forecast for growth of 0.8 per cent. Not impossible to get that mind you, although consumer spending is going to have to be pretty strong. We’ll see at 1130 AEST – my bet is something closer to half a per cent.
As for the Reserve Bank, yesterday’s statement was an odd one for sure, and said nothing really. Although that itself tells us a lot, especially when combined with the prominence given to the Australian dollar. We know that consumer spending remains solid and evidence points to ongoing momentum in the mining sector, with little evidence of a slowing in that space. So the board could only note that “The exchange rate has depreciated since the previous board meeting, although…it remains high considering the decline in export prices that has taken place over the past year and a half.”
That really says it all. They can’t pinpoint anything on the domestic economy to justify such low rates or the easing bias, and it all boils down to the dollar. The problem for them of course is that they can’t actually target the dollar, and this is a problem for the country as well. It is grotesquely inappropriate for policy to try to target something it can’t. This is basic economics and something that is founded on long standing principles. That these have been abandoned is of grave concern and a blight on this board.
In any case, at 0.96-ish cents no one could argue with a credible argument or evidence that the Aussie dollar is still overvalued. That said, they’ll likely cut again at a time when they can do so most credibly. It’s only a matter of the PR.
For the rest of the day and apart from the GDP figures at 1130 AEST, there isn’t much. The SPI suggests our stocks will fall 0.4 per cent. We see a private sector estimate of the Chinese services sector at 1145 AEST and then tonight we see the eurozone GDP breakdown.
For the US, we get the Beige Book, the non-manufacturing ISM survey, factory orders and the ADP employment report.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.