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The Overnight Report: Fed In The Dark

Daily Market Reports | Feb 23 2017

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Greg Peel

The Dow closed up 32 points or 0.2% while the S&P fell -0.1% to 2362 and the Nasdaq lost -0.1%.

Part Time Problem

The futures suggested the ASX200 would rise 31 points yesterday and it only managed 14, but Commonwealth Bank’s ((CBA)) dividend was worth 12 points so call it 26.

We can thus also call the -0.5% fall in the financials sector an actual win on the day which means the only sector not to finish in the green following a strong session on Wall Street was materials, which dipped slightly. Fortescue Metals ((FMG)) copped a bit of a “sell the fact” in falling -2.6% despite a good result.

Thereafter, sectors moves were once again result-driven.

Consumer staples won the day with a 2.5% gain thanks to comeback stories from Woolworths ((WOW)) and Coco-Cola Amatil ((CCL)). Healthcare scored 1.4% on a 5.8% rally from Healthscope ((HSO)). Telcos rose 0.9% thanks to a 9.3% gain for highly volatile Vocus Communication ((VOC)).

Industrials rose 1.3% on a mixed bag of results. Other notable moves among individual names included McMillan Shakespeare’s ((MMS)) 8.4% gain and Fairfax Media’s ((FXJ)) 8.1% gain as it prepares to spin off Domain. On the other side of the ledger we again saw stumbles among previous high flyers.

Blackmores ((BKL)) fell -10.3% but train crash of the day was media monitor iSentia, which plunged -35%.

We recall that in 2016, Australia added around 100,000 new jobs but that result was a net of 150,000 part time jobs added and 50,000 full-time jobs lost. The December quarter wage price index, released yesterday, rose by 0.5% to maintain an annual rate of 0.9% — the lowest since the data began being recorded in 1988. An unemployment rate of 5.8% is a complete furphy.

It’s a dilemma for the RBA, given anaemic wage growth would typically be a prompt for lower rates. But Governor Lowe yesterday made it clear in a Q&A Australia’s elevated level of household debt and mortgages over houses at runaway prices were reasons not to cut rates.

One of the main drags on the part/full time job equation is the ongoing decline in resource sector investment. Miners and related workers have been losing their full-time jobs steadily over the past few years while industries like tourism and hospitality – where part-time work is prevalent – have been on the rise. The ongoing decline in mining investment has also impacted on the construction sector.

Yesterday’s December quarter construction work done report showed a -0.2% drop over the quarter for a -7.8% drop over the year. The annual fall is split between a 2.1% increase in building work meeting a -22.8% decline in engineering construction.

The good news is the decline in resource sector investment does not have much further to run, so eventually the numbers will stabilise. But will they turn around and start growing? Commodity prices are presently supportive, but after 2016, miners are unlikely to be rushing back into new mega-projects. Most of them are still paying off debt.

Don’t mention 1987

In finishing in the green last night, the Dow marked its longest string of record closes since 1987. In October of that year, Wall Street fell -25% in a day. It remains the last great crash, when you consider the GFC played out over months rather than a single day.

But we won’t mention that.

The S&P500 – the more accurate measure of the US stock market – dipped slightly last night. The energy sector led the broad index lower. The oil price led the energy sector lower.

The flip-flopping of positive-negative news and commentary in the global oil market continues. On Monday night we had one OPEC representative affirming that members were indeed sticking to their production cuts, and that US shale growth did not pose a threat. Last night a different OPEC representative suggested that while OPEC members were toeing the line, non-OPEC members who had pledged to join in were not quite as quick to move.

In other words, Russia is falling short on pledged cuts. The WTI price is down -1.5%.

The minutes of the last Fed meeting were out last night, and caused a bit of confusion. In a nutshell, the FOMC expressed a desire to raise its rate again “fairly soon”, which suggests March is firmly on the table. The US dollar rallied and bond yields rose. But the committee also expressed its need to learn more about the new administration’s fiscal policy plans before they could confidently make a monetary policy change.

Trump has been talking up the timing, but it is unlikely any major policy changes will be made or even fully determined before the March Fed meeting. The dollar index is down -0.2% at 101.37 and the US ten-year bond yield is down one basis point at 2.42%.

We therefore have a stand-off. Janet Yellen has warned that it would be dangerous to leave it too long to tighten if the US economy is as strong as it appears, given runaway inflation would be a risk. But if strength is currently reflective of what the US expects, rather than what it will actually get, then the risk is Trump’s fiscal stimulus measures are wound back or held up in Congress for perpetuity. Then the Fed risks killing off an otherwise modest economic recovery.

Commodities

West Texas crude is down -US84c at US$53.54/bbl.

There were ups and downs among base metal prices last night, but none more than 1%.

Iron ore fell -US90c to US$93.60/t.

Gold is steady at US$1237.20/oz.

The Aussie is up 0.3% at US$0.7707, largely given Philip Lowe’s hint that rates will likely not be cut again.

Today

The SPI Overnight closed down -12 points or 0.2%.

Today will be the busiest day in the local result season, by a margin. Note there will also be a handful of ex-divs, including that of Rio Tinto ((RIO)).

The ACCC is today due to hand down its decision on the Tatts ((TTS))/Tabcorp ((TAH)) merger.
 

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