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The Overnight Report: Beyond 2000

Daily Market Reports | Mar 03 2015

By Greg Peel

The Dow closed up 155 points or 0.9% while the S&P gained 0.6% to 2117 and the Nasdaq rose 0.9% to 5008.

Rate Debate

It was all about “bad news is good news” on Bridge Street yesterday, just like they used to do it on Wall Street before the Fed ended QE. The question is: will the RBA cut today? At 85 points up for the ASX200 at its peak yesterday, you’d think the RBA was about to cut straight to zero. The close of up 30 points looks a little more sane.

TD Securities does not believe the RBA will cut today, despite issuing a February inflation gauge that was flat on January on both the headline and core rates. That leaves inflation at 1.3% headline and 2.3% core (ex food & energy), offering no impediment to the central bank.

TD Securities is in the minority.

Corporate profits sunk 0.2% in the December quarter despite the resource sector finding some stability and support from a lower Aussie. The slump in resource sector profits over the June and September quarters was a big contributor to the 5.9% net fall in profits in 2014. Wages grew by a mere 0.3% in the December quarter to be up 1.2% for the year.

There is little in the way of either price inflation or wage inflation at present. Low wage inflation is leading to softness in demand.

Australia’s manufacturing PMI fell to 45.4 in February from 49.0. The manufacturing sector continues to contract despite the falling currency.

And China cut on the weekend. Looking at the above data, and last week’s disappointing capex numbers and the jump to 6.4% unemployment, you’d think a rate cut was a no brainer. But there is a problem. House prices rose 0.3% in February to be up 8.3% for the year. Said the CBA economists:

“The most recent RBA interest rate cut looks to be adding further stimulus to the housing market as evidenced by the house price data, auction clearance rates and lending figures.”

All will be revealed at 2.30pm.

Global PMIs

February manufacturing purchasing managers’ indices were released across the globe over the past 24 hours, with mixed results. HSBC confirmed its take on China’s PMI rose into expansion, to 50.7 from 49.7. Japan saw a fall to 51.6 from 52.2.

QE is set to begin in the eurozone this month which will hearten European manufacturers. The eurozone PMI was flat at 51.0. The UK saw a rise to 54.4 from 53.4, while US economists were disappointed with a fall to 52.9 from 53.5.

Nasdaq 5000

US economists were also disappointed with January personal spending numbers. Spending fell 0.2% to mark the second consecutive month of falls – something which hasn’t happened since 2009. But it’s all down to oil prices, which are distorting the figures. Incomes rose 0.3% in January but most of this went into savings, so cheap gasoline or not, Americans are still somewhat reluctant to open their wallets.

And therein lies another interest rate debate.

Core inflation, as measured by the personal consumption-expenditures index (PCE), which is a different measure to the CPI, rose 0.1% in January. Apparently this was enough to set off selling in the US bond market, sending the ten-year yield up 8 basis points to 2.08%.

US stock markets shrugged off the soft data last night and posted a strong performance. They cheered in Times Square when the Nasdaq finally hit 5000 for the first time since 2000. The Nasdaq has only ever been above 5000 for eight days in history.

The big figure proved the peak for last night’s session initially, given the sellers quickly moved in, but a late spurt ensured a close of 5008. In the end it seemed that getting to the number was incentive itself, rather than any fundamentals behind the achievement.

Brent Comes Back

It was also an interesting night in the oil markets. I have noted how the WTI-Brent spread has been quietly blowing out of late, reflecting US oversupply, but last night a collection of factors saw Brent come screaming back. West Texas crude rose US41c to US$49.71/bbl but Brent fell US$2.48 or 4% to US$59.67/bbl.

The Chinese rate cut, confirmation of increased production in Libya, and progress with regard Iranian sanctions all conspired to set off the Brent plunge. Brent is the global oil price benchmark, given North American production stays in North America. The significance of the WTI price is nevertheless its reflection of the lower need for oil imports into the US, thus impacting other global producers.

The US dollar index rose 0.2% to 95.47 last night and gold fell US$7.30 to US$1205.00/oz. Base metal prices were again mixed on inconsequential moves. Iron ore fell US20c to US$62.80/t.

On the strength, or lack thereof, of yesterday’s local data releases, the Aussie is down 0.5% to US$0.7770.

Today

The SPI Overnight rose 14 points or 0.2%.

Today sees the release of Australia’s December quarter current account data, including the terms of trade. January building approvals are also due, and then at 2.30pm the rate that stops the nation will be announced.
 

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