Quick Recap: US stocks were marginally weaker on Friday night with energy stocks under acute pressure. But it was US interest rate markets and the US dollar that were the story of the night after the weaker than expected US wage inflation report. That’s important because in many trader’s minds weak wages growth is a good reason for the Fed to delay its first rate hike.
As a result of the data US two year treasury rates fell from 0.74% to 0.66%. The 10 year rate fell from 2.26% to 2.18%, a one-month low, according to Westpac’s New Zealand based strategist Imre Speizer. The US dollar moved aggressively in the aftermath of the data release with the Euro hitting a high of 1.1112. But the air was too thin up there and it fell as the US dollar recovered. The Aussie and Kiwi also bounced sharply before pulling back.
On commodity markets gold bounced and iron ore on Dalian rocketed but crude crashed again and base metals fell heavily.
The overnight scoreboard (7.00am AEST):
- Dow Jones -0.32% to 17,689
- Nasdaq flat at 5,128
- S&P 500 -0.23% to 2,103
- London (FTSE 100)+0.41% to 6,696
- Frankfurt (DAX) +0.46% to 11,308
- Tokyo (Nikkei) +0.30% to 20,585
- Shanghai (composite) -1.13% to 3,664
- Hong Kong (Hang Seng) +0.56% to 24,636
- ASX Futures overnight (SPI September) -12 to 5,638
- AUDUSD: 0.7310
- EURUSD: 1.0977
- USDJPY: 123.87
- GBPUSD: 1.5627
- USDCAD: 1.3086
- Crude: $47.12
- Gold: $1,095
- Dalian Iron Ore (September): 414
– Now the news The Employment cost index in the US was a big surprise to traders with a print significantly lower than expected. BI US’s Corey Stern reported that “Wage growth hit a record low in Q2. The Bureau of Labour Statistics announced this morning that wages grew by only 0.2% — the smallest quarterly gain since the series began in 1982. The employment cost index rose 2% year-over-year following a 2.6% gain in Q1. Wall Street was expecting the year-over-year gain to be 2.4%. This is the final ECI report before the September Fed meeting, and could play a significant role in whether or not the central bank decides to raise interest rates for the first time in nine years.”
According to reports from traders, this is why US bonds rallied hard, especially the front end of the curve as noted above. Lower inflationary pressures could either delay or truncate the size of the Fed tightening cycle. Australian bonds were a bit better bid with the 3’s down 2 points to 1.89% and the 10’s to 2.74%.
– Forex moves were extremely curious with the sharp sell off in the US, just after the ECI was released, reversing sharply. But Ray Attrill, the NAB’s co-head of global currency strategy, explained it:
In FX, much of the sharp slide in the dollar in the immediate aftermath of the ECI data was subsequently reversed thanks in part to an upside surprise in the Chicago PMI but also comments from St. Louis Fed president James Bullard. On Friday became the first Fed official to have given an interview or speech since Wednesday’s FOMC meeting conclusion. He told the WSJ that ‘we’re in good shape’ to lift rates at the Sep 16-17 FOMC gathering and suggested that at last week’s meeting, the Fed wanted to see how the subsequently released Q2 GDP data shaped up before clearing the way to act. Bullard shrugged off Friday’s report showing surprisingly tepid wage gains, saying he isn’t worried about that situation right now.
That’s interesting given forex traders watched Bullard but interest rate traders ignored them. “Once again, FX looks to be well ahead of the US rates market in anticipating the first (and perhaps subsequent) Fed moves,” Attrill said.
– Notable among the major currencies in the data table this morning is the weakness in the Canadian dollar. Attrill said this was a result of “lower oil and weaker GDP (May -0.2%).” He also noted “Canadian PM Stephen Harper has just called the general election for 19 October and where latest opinion polls put the centre-left opposition narrowly ahead of the incumbent Conservatives.”
– Turning back to stocks and the big news is Athens will re-open today. The market has been closed since late June and there is likely to be a solid downward move.
– Speaking of down, oil crashed again on Friday night with the front Nymex Crude contract losing 2.89% to $47.12 a barrel. That’s back near the lows of the year which are the lows for many years. Prices dipped after the release of the Baker Hughes rig count, which showed supply was up with five new rigs added to the total. There’s been a massive fall in the price of crude over the past year, particularly in the past few months. On Friday Chevron reported a 90% drop in profits while Exxon Mobil reports profits were down 52% year-on-year. But the big fall in oil hasn’t helped Australian’s at the pump. Here’s why petrol prices are still so high in Australia even though crude oil is crashing.
– Elsewhere on commodities, gold climbed off the mat it was on Friday afternoon our time to rocket from the mid-$1070 region to briefly climb above the $1,100 region. That meant it avoided a weekly or monthly close below the technically important $1,085 region.
– Looking at the local market and futures are indicating the ASX 200 is going to have a weak start to a week jam-packed with data and earnings reports. Certainly there are lots of catalysts for trade and with the physical market up near the recent resistance level of 5700 we could be in for a quieter start to trade today. Particularly given it’s a bank holiday in Sydney.
– In China over the weekend we saw the release of official PMI data which Attrill said “to the surprise of nobody… failed to validate the sharp decline in the earlier Caixin (formerly HSBC) Markit version that recall fell to 48.2 from 49.4. It slipped to 50.0 from 50.2 and the 50.1 expected. The services reading rose to 53.9 from 53.8.” Today is PMI day again in Asia and around the world. But none of this matters on the stock market it seems. After a day of small moves the Shanghai composite index flipped around in the last couple of hours of the day to end down a little more than 1%. This type of trade suggests the market is becoming illiquid.
– The data flow today could fill even the most drought stricken river. Even though most Sydney trading rooms will be out Monday we still see the release of the AiGroup manufacturing PMI, TD Securities monthly inflation index, as well as HIA home sales and ANZ Job Ads. Offshore Markit manufacturing PMI is out around the world on Monday. Chinese data will be watched very closely given the recent questioning of the official Chinese growth figures. In the US personal consumption expenditure is an important counter point to the ECI on Friday while ISM manufacturing is also out.
And now from CMC Markets’ Ric Spooner is today’s Stock of the Day
Fortescue Metals (FMG.ASX)
Friday ‘markets bore the hallmarks of a low demand growth, low inflation global environment. The US employment cost index was disappointingly low, showing little sign of much needed wage growth while traders bought bonds and sold commodities (including iron ore).
Against this background, Fortescue’s chart began to show signs of weakness on Friday. The move below the peak labelled “A” would be consistent with the finish of a 3 part, or “ABC” correction and could signal another leg down in FMG’s downtrend.
Ric Spooner, chief market analyst, CMC Markets
You can follow Ric on Twitter @ricspooner_CMC