SCOREBOARD: US brush-off

US jobs and ISM data surprised on the upside, but markets remained fixated on China worries.

Two great pieces of news out the US this week and markets barely blink. Truly amazing, but it seems the market is now firmly on track three of this never ending three-track CD – China slowing/ hard landing. It’s a song we’re all familiar with, although it has grown tired.

As to that US data, the nonmanufacturing ISM survey was released last night showing the services sector, which is about 80 per cent of the economy, accelerated in September. The index rose to 55.1 from 53.7, which compares favourably to expectations for a fall to 53.4. Actual production is stronger than that, with the index at 59.9; new orders are robust at 57.7 and prices spiked. Employment fell, although it remains above 50 and inventories weighed, falling 4 points in the month – the pick-up in demand obviously taking firms by surprise. Understandable given the commentary.

So that pick-up backs the manufacturing ISM index that we saw earlier and is supported by the ADP employment report. Oh and I shouldn’t forget a strong pick-up in car sales. Recall this isn’t a great survey, but still, neither are the PMIs and they seem to get some press. In any case, the ADP report suggests 162,000 jobs were added in September, stronger than the 140,000 expectation. If this is realised in payrolls on Friday, that would show jobs growth at a stronger pace than its pre-GFC average.

So this is all good data – strong data – but as mentioned markets are only getting modest support from it. At the high for instance, the S&P500 was up 0.6 per cent and some of those gains were given back in subsequent trading. At the close we’re talking a gain of about 0.36 per cent (1450). The Dow was actually flat ( 0.09 per cent to 13494), while the Nasdaq was up 0.5 per cent (3135).

The more bizarre price action, once again, was on crude. Meanwhile most markets were mixed, including other commodities I might add, with gold up smalls to $1779, silver down smalls, copper off 0.9 per cent, while WTI slumped again. Most of the global press suggests the decline in oil was due to renewed China fears. We did see a non-manufacturing China PMI yesterday which fell to 53.7 from 56.3. Two things though. Firstly, the rest of the price action tells you the market isn’t that concerned, especially with Chinese stocks rising sharply yesterday and most other commodities making small moves. Secondly, the PMI yesterday is still above the 50 mark and is consistent with solid growth. No, this is very oil specific and even occurred despite a fall in crude inventories for the week (as reported last night by the EIA). Another fat finger error perhaps.

As for forex and fixed income there wasn’t much – the Australian dollar is little changed at $US1.0213, ditto the euro at $1.2902. The great British pound was then 40 pips lower at $1.6072, while yen sits at $78.5. Then for US treasuries, the 10-year yield was up a little to $1.6195, while the 5-year is at 0.6 per cent and the 2-year sits at 0.23 per cent. Aussie futures were off about 2 ticks a piece, with the 3s at 97.72 and 10s at 97.165.

Bits and pieces otherwise, the final estimate of the composite euro zone PMI was revised up a little to 46.1 from 45.9. Portugal announced some tax hikes – such as a 4 per cent income levy – which would bring the average hike to 13.2 per cent in 2013. But there wasn’t much else. European stocks, for what it’s worth, were mixed with the Dax up 0.2 per cent, the CaC down the same, while the FTSE was 0.3 per cent higher. Spanish and Italian bonds sold off a little (yields a bit higher – a basis point here or there). The Spanish 10-year sits at 5.74 per cent, while the Italian yield is at 4.97 per cent.

Looking at the day ahead, the SPI suggests a modest lift in Aussie stocks (0.3 per cent) and Aussie data includes building approvals and retail sales at 1130 AEST. As a quick comment on those trade numbers yesterday, they are actually very positive, notwithstanding the rise in the deficit. That’s because the trade figures show economic activity is strong. They are very good numbers. Exports fell but this is a nominal fall driven by iron ore prices. Actual volumes of iron ore exports remains strong and when we are still talking very high prices for iron ore, the hysteria over the price declines, especially from policy makers and economists, is a national embarrassment. On the imports side the figures show businesses are still investing strongly (espeically in volume terms) and they also show ongoing strength in consumer demand.

Tonight, the market is expecting the ECB’s and BoE’s decision (no changes expected). On the data front, there are two key releases – initial jobless claims and factory orders.

Have a great 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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