The week closed on a disquieting note after US non-farm payrolls printed their worst jobs growth since 2010.
Stocks initially weakened but then recovered. But the US dollar was hammered as expectations of an imminent Fed rate hike collapsed.
That saw the Aussie dollar burst higher gaining 1.87% Friday to close at 0.7364 as the Euro, Yen, Kiwi and CAD surged.
Crude fell under the weight of worries about the US economy, but copper and iron ore rallied as the US dollar fell.
The week ahead looms large with the RBA decision Tuesday, or more correctly the governor’s statement, which will be the local focus while a speech by Janet Yellen will take the international spotlight.
And, with less than 3 weeks till Britain’s EU referendum traders will be paying close attention to the polls.
After the US employment shocker the market is wondering if the Fed can tighten. Friday’s non-farm payrolls showed the US economy added just 38,000 jobs in May, the fewest for any month since September 2010 when the economy actually lost jobs. Richard Franulovich, Westpac’s New York based currency strategist said Friday that “even accounting for the Verizon effect excluding the Verizon effect a pronounced slowdown in the monthly pace of jobs growth is now apparent: +233k (Feb), +186k (Mar), +123k (Apr) and +38k (May), or +75k if one throws striking Verizon works back into the sample. This monthly profile is beginning to look weaker than the average profile seen in past “soft patches” that have periodically bedeviled the US economy during this post-crisis recovery. The 3mth average is now down to a paltry 116k, the weakest since mid-2012. Today’s data perhaps just adjusts the labour market back into line with what have after all been a couple weak quarters for the US, with Q4 GDP at +1.4% and Q1 at +0.8%.”
That’s a read on the economy that many traders appear to share. Pantheon Macroeconomics’ Ian Shepherdson wrote in a note following the report “and thus died the June rate hike”. Throw in Friday’s release of Markit’s services PMI which printed 51.3 which was the softest reading since the US recession the chances of a June Fed hike are receding.
That makes Janet Yellen’s speech next week, and whether she continues her recent more hawkish bent, the highlight of the week in many traders’ minds.
What’s next for the stock market? With non-farm payrolls missing market expectations by a mile stocks in the US, the local SPI 200 in Sycom trade fell initially but then recovered Friday. That prices recovered is a positive for the market. But the data, and the price action of stocks — which sees the S&P 500 at the top of its recent range — begs the question of what’s next for stocks.
The bears will tell you that after a strong rally off the lows of the year the market is once again fully priced with the S&P 500 at 2100, just 1.66% below the all time high. The bulls will point to the reality that against the many economic headwinds, including the Fed’s signalling of an imminent rate hike, cash continuing to leave the equity market stocks in the US, and around the world, have remained firm. That, and all the cash on the sidelines, is a strong argument.
But, as the ASX200 showed this week with 3 days of unrelenting selling which left the market down 90 points for the week — even after Friday’s 40 point gain — the uncertainty is still weighing on traders. In the end, all eyes are on the top of the recent range in the S&P 500. If it breaks, bulls in the US and here in Australia will rejoice. But it has to break first.
Australian Calendar — (courtesy NAB Economics, our emphasis)
Inflation and housing will be the focus in a week dominated by the RBA board meeting and governors statement Tuesday. The release of the Melbourne Institute Inflation Gage is more interesting than usual with market players watching closely “to see whether the disinflationary impulse reflected in the Q1 CPI is continuing into Q2 (Q2 CPI released 27 July),” the NAB’s economics team said in their weekly outlook.
Jobs ads are also out Monday and may give some indication of the Australian jobs release due on June 16. Tuesday sees the release of the latest update of the ANZ Roy Morgan consumer confidence reading and the AIGroup performance of construction survey which gives a reading on Australia’s building industry.
With housing prices tearing higher again, Wednesday’s release of housing finance data will be closely scrutinised for any indication of investor lending accelerating again which could worry APRA and the RBA and perhaps forestall the still expected rate cuts.
No cut from the RBA — but all eyes on the governor’s statement. The NAB’s economics team says the focus of traders on Tuesday afternoon at 2.30pm will be “for a sense of any shift of view on prospects for the economy after this week’s GDP and monthly data points”.
The NAB says “the market will be particularly interested in how the RBA is reading this week’s economic activity reports and what implications, if any, March quarter GDP has for the outlook. While growth was on the stronger side of consensus expectations, GDP year-to growth of 3.1% was almost right on the Bank’s 3% point forecast in the May Statement on Monetary Policy, not to mention close to NAB’s forecast!”
In other words, it was not a surprise to the RBA and shouldn’t have been a surprise to the market.
Traders will be hanging on the Governor’s final paragraph and any hints of policy intent or bias. The NAB said:
We would not be surprised to read something along the following lines that hints or implies an openness to ease again should the data and outlook warrant such action – something like: “Incoming information on economic and financial conditions over the period ahead will inform the Board’s assessment of the outlook and whether the current stance of policy will most likely foster sustainable growth and inflation consistent with the target.”
International Calender (also courtesy NAB Market Economics)
US: Yellen’s set piece speech Monday on the “Economic Outlook and Monetary Policy”, is a potentially punchy address. Otherwise, it’s a light week ahead for data with the FOMC the week after.
China: Foreign reserves Monday, Trade Wednesday, then CPI/PPI Thursday. The main focus will have to wait for Saturday’s May month industrial production, retail sales and fixed assets investment reports. New yuan lending and aggregate financing volumes data is due any day from Friday.
Japan: Leading index Monday, balance of payments and revised Q1 GDP Tuesday, machine/machine tool orders Thursday, PPI, Tertiary industry index Friday.
Euro: EZ Sentix Investor Confidence Monday, revised Q1 GDP Tuesday with German Industrial Production. ECB’s Draghi speaks Thursday.
UK: Light week ahead — Industrial production Wednesday; the market will continue to be besotted with any Brexit polls.
Canada: Employment report Friday the highlight. Also, Ivey PMI Tuesday, housing starts/ building permits Wednesday, house prices and capacity use Thursday.
NZ: RBNZ likely to hold rates steady Thursday but retain an easing bias; pre-GDP (due the following week) with wholesale sales Tuesday and manufacturing sales Wednesday; electronic card transactions are out Friday. It’s the Queen’s Birthday holiday Monday.
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