SCOREBOARD: New health
First things first – a big Happy New Year to all! May every investment decision you make enhance your wealth – heck, even your health – and help to spread peace and justice throughout the world. Okay maybe the last bit is asking too much. Let's just hope it's another profitable year.
So far it hasn't been too bad, I guess. Thankfully – and phew – the fiscal cliff has come to nought and we come back to a world where stocks are 4 per cent or so higher over the last week. This is quite something as it brings the S&P500 to its highest close since late 2007. The All Ords in contrast is only at its highest since May 2011 (and still 30 per cent lower than in late 2007), which is when domestic talking heads started harping on about the non-existent slump in consumer spending, recession, fiscal contraction, the strong Australian dollar et cetera. You want to know why the Aussie market has underperformed? That's it.
It's the pessimism here, the strong push by industry groups to talk interest rates down. In the process they've destroyed confidence and scared investors away, which is sheer stupidity for mine and the reason I've been arguing so strongly against them – they are damaging the economy. It's not the strong Australian dollar, by the by, that is weighing on the market and indeed some stocks that are more exposed to a strong Australian (like CSL) etc have put in a sterling effort, playing no small part in seeing the domestic index up 15 per cent over the last year. But as good as that gain is, it only takes us back to where we were prior to all the taking head rot.
Outside of equities, The US 10-year bond yield is about 14 bps higher over the last week or so, (1.9 per cent) and 30 bps higher over the month. Aussie bonds have followed suit of course and our 10-year sits 30 bps or so higher over the last month to 3.44 per cent. Gold is off $30 for the week and $66 over the last month, while crude is $8 higher at $93 (WTI) – $3 just over the last week. Our beloved currency in contrast has done nothing and still sits around the $1.0478 mark.
Now, although the cliff has been averted, it's not the last of it. The debt ceiling is still unresolved and may be a cause of instability at some point in the not too distant future. The ceiling was actually hit new year's eve apparently, although the US Treasury has some alchemy up its sleeve, which means the US can still pay its bills up till the end of February. As the largest holder of US debt, the US Federal Reserve would have to be relieved – it would be an unmitigated disaster if the US government defaulted on its debt to itself. Okay fair enough, maybe I'm being a little too flippant here, but look, I'm sure they'll sort it out, they have in the past. In any case, and in all seriousness, there are plenty of people who advocate just that. The US government cancelling the debt it owes itself through the Federal Reserve System (officials have ruled this out though).
Against that backdrop, and aiding the risk bid, the US economy still looks solid and isn't really showing any sign of the persistently expected weakness. This is a good recovery we're seeing and indeed it's one of the strongest. It was particularly positive that we didn't see any impact of said fiscal cliff or debt uncertainty on job creation. Not an unreasonable expectation as employers may be less inclined to hire if they think the world is ending. We got the December job numbers just on Friday night and they were great. Payrolls rose 155,000 in the month following a 161,000 increase in November, which is strong jobs growth. Recall that in the years prior to the GFC, average month payrolls growth was around the 130-140,000 mark. So we are talking about very solid jobs growth here. Indeed, payrolls suggest 1.8 million jobs were created over the last year, although the household survey points to just under 2.5 million jobs being created – these are good numbers and point to an economy growing just over trend. Otherwise, the unemployment rate held steady at 7.8 per cent while over the last year the rate has slumped from 8.5 per cent.
For the week ahead there are a few points of interest for the Australian market but not many. Plenty of people are still on holidays so I can't imagine too much happening. Key macro data includes Australian trade data on Tuesday, with retail sales on Wednesday and building approvals Thursday.
It's not that much more exciting abroad to be honest. In the US there is only a smattering of data and not much of that is really tier one stuff – so things like the NFIB small business optimism (Tuesday night), consumer credit (Wednesday), initial jobless claims Thursday, while trade data and the monthly budget figures are out on Friday.
Elsewhere its worth watching out for German trade and factory data, European retail sales and the business climate index on Tuesday. Wednesday sees German industrial production and then on Thursday the ECB meet. No change is expected here and in fact over the last couple of weeks, Europe's problems eased even further. Yields on Spanish and Italian debt are down sharply – the Italian 10-year is down 20 bps over the last week or so to 4.2 per cent, which is the lowest yield since late 2010. The Spanish equivalent is down almost the same and sits at 5 per cent. Six months ago it was pushing eight per cent!
Finally, we get a reasonable flow of China data on Wednesday (inflation, retail sales and industrial production) and Thursday (trade data), which is well worth watching obviously.
The bottom line for the week is that there is unlikely to be any significant change in sentiment or market direction – that is barring some massive downside surprise on the Chinese data, which generally doesn't happen.
That's about it, I hope you have a good week…
Adam Carr is a leading market economist.
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