The Overnight Report: Inflated Odds

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By Greg Peel

The Dow closed up 45 points or 0.2% while the S&P fell -0.1% as the Nasdaq dropped -0.5%.

Nice Work

For the sixth month in a row, Australia has reported strong jobs growth. August saw 54,200 jobs added, split 40,100 full-time and 14,100 part-time. A rise in the participation rate meant the unemployment rate held steady at 5.6%. The result was much stronger than expected.

The underemployment rate fell by -0.2%, but is still at a significant 8.6%. Despite surprisingly solid growth this year, economists are not rushing to assume the RBA will hike anytime soon. Rather, the timing of the expected first hike has come in a little from an assumed late 2018.

Chinese industrial production grew 6.0% year on year in August, down from 6.4% in July and below forecasts of 6.6%. Retail sales grew 10.4%, up from 10.1% but missing forecasts of 10.5%. Fixed asset investment grew 8.3% year to date, as it had done in July, above 8.2% expectation.

The two data sets above were the main focus of attention on the local market yesterday in a session that once again saw choppy trade and little ultimate movement for the ASX200. The Australian jobs number was a positive, other for the implication of eventually rising interest rates on yield plays. Yet the banks had another good session with a 0.4% gain, and telcos bounced 0.6%.

It was left to utilities (-0.4%) and consumer staples (-0.6%) to suffer as defensives. Resources sectors traded off a solid gain in the oil price and weakness in base metal prices to provide a 0.7% gain for energy and a -0.9 fall for materials.

Healthcare (-0.9) had a bad day because the Aussie initially shot up on the jobs number. We also saw all of Sirtex Medical ((SRX)), Primary Health Care ((PRY)) and Regis Healthcare ((REG)) among the top five losers on the day.

All in all a mixed bag that got us nowhere and didn’t tell us much, other than the Australian economy is looking more healthy than one might assume, the Chinese economy is not quite as healthy as it had appeared to be more recently, and the rotation trade out of materials and into the banks remains ongoing.

Fed Watch

US headline CPI inflation jumped 0.4% in August, beating expectations of 0.3%. The annual rate rose to 1.9% from 1.7%. On that basis, the odds of a Fed rate hike in December shifted back to 50% from 42% previously.

It is unclear why. The core CPI, ex food & energy, rose 0.2%, which is actually the biggest rise in six months, but the annual rate was unchanged at 1.7%. It is therefore stuck below the Fed’s 2% target rate, and the Fed prefers the PCE measure of inflation anyway.

The big headline jump was all to do with the spike in gasoline prices late in the month. It will take a while for prices to ease back, given the slow pace of refinery re-openings in Texas, but either way it is the sort of element the Fed would describe as “transitory”.

The Bank of England is a better chance to hike this year. Last night’s policy meeting resulted in the cash rate and QE program remaining unchanged but the governor did warn rates are likely to rise faster than the market is assuming.

Deutsche Bank upgraded the high-flying Boeing to Buy last night, which is pretty much the only reason the Dow posted a third consecutive record high. It was otherwise an unremarkable and slightly soggy session on Wall Street in the wake of the triple-index high being marked on Tuesday. Weakness in the Nasdaq was largely due to ongoing profit-taking in the prior big gainers Apple and Amazon.

Kim Jong-un has threatened to “sink” Japan and turn the US into “darkness and ashes”. Atlas shrugged.

Gold is up US$6.50 which might reflect a little NK fear, but the US dollar index is down -0.4% on the back of the pound jumping on BoE rhetoric.

The US bond market decided the CPI result was much ado. The ten-year yield closed unchanged at 2.20%.

Commodities

The sell-off in base metals continues, despite the weaker greenback. We can thank the Chinese data no doubt. Aluminium and zinc fell -0.5% in London, copper -1% and nickel -1.5%.

Iron ore fell -US80c to US$74.40/t.

West Texas crude is up US41c at US$49.72/bbl.

Gold is up US$6.50 at US$1329.00/oz with the dollar index down -0.4% at 92.05.

The Aussie was back up over 80 following the jobs numbers but has since eased back to be 0.2% up at US$0.7999.

Today

The SPI Overnight closed up 7 points.

The US will see industrial production, retail sales and consumer sentiment data tonight. It is also the quarterly quadruple witching expiry of equity derivatives, which can cause some unnecessary volatility.

The ASX index rebalancing announced previously will come into effect today. Otherwise, there are no ASX200 companies going ex today, for a change. Still plenty more ex-div action to come in the month nonetheless.

Today already has very much a “Friday” feel to it.

Rudi will connect with Sky Business via Skype to discuss broker calls at around 11.15am.
 

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