You’d be forgiven for thinking Friday night’s massive 287,000 rise in non-farm payrolls, which was accompanied by strong wages growth for workers, would worry traders that the Fed might be back in play.
No such thing.
Stocks rallied hard, bonds stayed low and the US dollar didn’t kick too hard. In the end the S&P 500 is just a few points below its all-time high after a 1.53% rally.
That’s left the ASX’s September SPI futures pointing to a 61 point gain when the physical market opens this morning but the chances are high that understates the outlook (see item 3 below).
The Aussie dollar is higher as well, up at 0.7564 this morning 90 points higher than this time Friday. The Kiwi is higher but the CAD has dipped with the price of oil. Gold is sitting at $1366, just below resistance, but oil is at the bottom of the recent range and at risk of a break down.
Here’s the scoreboard (7.29am):
- Dow: 18146 +250 (+1.4%)
- S&P 500: 2129 +32 (+1.53%)
- SPI200 Futures (September): 5,250, +61 (+1.2%)
- AUDUSD: 0.7564 +0089 (1.2%)
The top stories
1.US jobs on Friday were a goldilocks report. Jason Wong from BNZ in Wellington summed up the markets reaction nicely in his morning report noting (my emphasis):
The increase in non-farm payrolls in June of +287k was stronger than the market expected, indicating a recovery after a couple of very soft months. But other details of the report were soft, including downward revisions to jobs growth over previous months, a higher unemployment rate, and lower than expected wage inflation. This was seen as a goldilocks report, strong enough to suggest that the economy wasn’t falling into a hole but weak enough to suggest that the Fed wouldn’t be tightening anytime soon.
That’s the point I made in my Oz Diary on Sunday when I explained why we have a goldilocks report which pushes stocks toward a new all-time high, keeps bonds bid and doesn’t harm the US economy by making the dollar stronger. Perhaps all this was possible because when you add the May and June numbers together and divide them by two and you get about 150,000 jobs, which is still a miss on expectations for both months. That is likely to keep the Fed on hold for a while longer.
2. How high can the Aussie dollar go? I don’t like to rehash my Weekly Oz diary here but the discussion of how high the Aussie might go is likely to be fascinating traders around the market today given the Aussie is sitting at 0.7572 this morning.
That’s not a typo and it’s very strong given the US jobs data on Friday. The Kiwi was strong as was the Canadian dollar as well. So it’s worth asking how high the Aussie can go. Naturally, the Aussie is still pretty much universally loathed with most pundits forecasting levels below 70 cents and toward 65, even 60 cents in the Aussie’s future. But the Aussie traded up to 0.7640 in pre-Brexit trade and that looks a reasonable target given the good news the market is expecting from this week’s data flow. But could it run back toward 78 cents? The short term daily uptrend and the long term weekly downtrend converge at 0.7810/20, so chartists will be watching.
3. The ASX is due for a 170 point rally. 2016 has been a tough year for the ASX 200 but after the strong rally in the S&P which has taken it back toward its all-time highs, it’s time for the ASX200 to play a little bit of a catch-up.
On Friday night the lead sectors of the S&P 500 were basic materials and financials. The sectors that dominate the ASX. Elsewhere gold finished at $1365 looking storng (although the AUDUSD rally hurts the XAUAUD price) and iron ore is hanging tough regardless of Friday’s downgrade by the Australian government forecaster. So it should be a good day for the ASX and the potential is there for a much stronger rally than the 61 points the SPI 200 futures are suggesting.
That theory of mine is supported by the gap that has opened up in the move from the S&P and that of the ASX200. It’s a crude correlation but one that suggests to catch back up to the moves in the S&P the ASX has 170 points of gains ahead of it. Here’s the chart from my Reuters Eikon Terminal.
4. Inflation stayed low in June – Here comes more Chinese stimulus. China’s inflation rate remains under downward pressure with the annual rate falling to 1.9% in June from 2% in May data released over the weekend showed. Food prices eased again and the price of pork fell from May’s 33.6% rise to a still mind-boggling 30.1% for the Chinese staple.
Producer prices in China extended their run of deflation to 51 months with a print of -2.8% in June.
This combination will worry the PBOC on its own. But the extremely grim outlook for global trade that came from the G20 trade ministers meeting in Shanghai over the weekend adds weight to expectations that the PBOC will need to release more funds and provide more stimulus to keep the economy chugging along. I’ve got more here.
5. Stocks and Gold both strong – that’s weird and says gold can keep rallying. My little hobby horse lately has been the big rally in gold, at a level just below the downtrend line which stretches back to the 2011 high. In the absence of inflation normally when stocks are strong you wouldn’t expect gold to be coincidentally strong.
But negative rates and uncertainty have changed everything in 2016 for gold. BAML says that panicky investors are pumping billions into bonds and gold. Ben Moshinsky reports BAML’s flow report showed precious metals funds had inflows of $4.4 billion, the most in a week since data began in 2005 over the past week. So it’s no surprise nothing can knock gold lower at the moment.
As Moshinsky points out gold is the asset to own, according to Swiss bank UBS. It has “entered a new phase,” the bank said in a note this week,increasing its annual forecast for gold to an average of $1280 per ounce, compared to $1225 previously.
6. And lest you think everything is suddenly cheery today — Morgan Stanley says there is a 40% chance of a global recession in the next year. I heard Saul Eslake say one time on the telly that if you scratch an economist and ask them the recession probability on a one or two-year time frame their default rate will likely be around 20%.
Leaving aside the fact that means there is an 80% chance of no recession, that’s something I always remember when I see headlines that so-and-so says there is a 20%, or 25%, or even 30% chance of recession. But when we start to get into the 40% chance region — like Morgan Stanley now has — we’ve moved beyond default probabilities to something more worrisome. So it’s worth a look.
Chloe Pfeiffer reports the bank has raised its estimate on the probability from 30%, because of Brexit and the political and economic instability of its aftermath.
“The negative impact of a rise in political uncertainty on risk assets and demand growth is well documented… as a result, we are more cautious on global growth.” So they’re raising the probability of recession from their previous 30% to 40%,” Morgan Stanley said in a note.
AND ICYMI Here’s my weekly look ahead for markets — AUSTRALIAN DIARY: Everything you need to know about the week ahead for markets.
Key data for the past 24 hours (with thanks to BNZ markets)
UK: GFk consumer confidence, Jul: -9 vs. -1 prev.
US: Change in non-farm payrolls (k), Jun: 287 vs.180 exp.
US: Unemployment rate (%), Jun: 4.9 vs. 4.8 exp.
US: Average hourly earnings (y/y%), Jun: 2.6 vs. 2.7 exp.
CH: CPI (y/y%), Jun: 1.9 vs. 1.8 exp.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
US jobs growth over recent months now fits much better fit with what’s been going on in the economy after Friday’s much improved number. Consumer spending, housing and the non-manufacturing pmi have all pointed to solid growth in the 2nd quarter so you would expect jobs growth to be at least reasonable. The Fed is going to remain constrained by global conditions but with the jobs data back on track, the risk to the market outlook on a Fed rate hike is to the upside given current low expectations.
That implies upside risk to $US and downside to AUDUSD despite Friday’s rally. That’s a scenario which always gets me thinking CSL given that it benefits from a weak Aussie. The 61.8% and 78.6% retracement levels around $108.60 and $107.40 might represent opportunities if there is a pull back over coming weeks.
Ric Spooner, chief market analyst, CMC Markets. You can follow Ric on Twitter @ricspooner_CMC