Friday saw a soft finish to a week where US stocks ended another 1 per cent higher, European stocks were 2 per cent higher and our own market about 1.3 per cent higher. Falls were only modest though – for the most part around the half-a-per cent mark give or take, except the Dow which fell 0.8 per cent and the Nasdaq which ended the session flat.
From those results you can probably already tell that there was no earth shattering news. Just a few minor indicators and they were mixed – the Milwaukie NAPM spiked to 51.5 from 40.6, but then the Chicago PMI fell to 51.6 from 58.7 (both June figures). The final estimate of the University of Michigan’s consumer confidence index was revised higher as well in June to 84.1 from 82.7. Anyway, despite the soft session for US stocks it was the best half-year since 1999 – which is quite something.
I suspect the lack of action on Friday also reflects the fact that it’s a huge week this week. Payrolls on Friday are obviously all-important and have the potential to dictate market sentiment for weeks to come. At the moment, the market is looking for a relatively benign 155,000 increase in payrolls. This is a good, strong result. But I say benign because it isn’t a ‘wow’ result. Something that will spook the market into thinking economic momentum is about to accelerate. Good, but not too good. In any case, trying to predict how markets will react to good news is virtually impossible nowadays.
There is plenty in the domestic market that will keep punters occupied as well and for once we could see some decent moves on the results. Recall that the dominant narrative here is that Australia is headed for a downturn, whether you want to use the ‘recession’ word or not. This will keep the Reserve Bank (decision at 1430 AEST this Tuesday) in play, although few expect a cut at this meeting.
The probability of a cut at this meeting must be high though. We know the board has cut rates to lower the dollar and has often relied on a very pessimistic interpretation of data to justify that stance, even still holding that position when the data swung in the opposite direction. Think the pre-emptive action to deal with Europe, global growth concerns etc.
That the dollar has come down some 12 per cent or so (largely on the back of QE tapering fears) doesn’t preclude further cuts though. The issue is the Australian dollar target, and no one knows what this is. Eighty-five cents seems to be in the market psyche and perhaps this is where the board thinks the dollar should be. All we know is that they think the Australian dollar should be lower. Further cuts will come then and the consensus is in August. For me, and for a board that is still determined to cut, August presents some difficulties though.
Firstly we get another inflation print and currently inflation isn’t going in the direction the board wants. So far inflation has lifted from its lows and now sits in the middle of the target. For mine, if they wait for inflation and it doesn’t deliver a result they want, it’ll make things difficult for those who want a lower dollar – even if inflation pushes even modestly higher.
Similarly, the global data flow isn’t working for the Reserve Bank, especially US data which shows the economy accelerating. The likelihood is that waiting will only see further solid economic dataflow, in turn making it more difficult to cut. And that's not to forget the election. It’s a tough one – balancing the Aussie dollar’s current momentum, the desire to still see a weaker currency and the clear difficulties that delaying a cut might present.
Other than the Reserve Bank meeting we also see retail sales and trade data, while on Thursday we get building approvals. Today we see house prices, TD securities inflation gauge and new home sales.
Globally, the key data as mentioned will be payrolls but we also get the manufacturing ISM report, which the market pays close attention to, especially now as it’s dipped below 50. That’s out tonight and expected to rise above 50 again. Elsewhere we see Chinese manufacturing PMIs at 1100 AEST today, while the Bank of England and European Central Bank meetings come Thursday night.
Have a great week.
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.