The Monday Report

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By Greg Peel

Retail Shock

Weak income growth, high household debt, rising utility prices, increasing competition – all reasons why Australian consumers are keeping their wallets in their pockets unless bargains are available. Economists had expected retail sales to rise 0.4% in September but instead they were flat.

Annual sales growth is a meagre 1.4%. Over the September quarter, retail volumes rose by just 0.1%. Price declines were reported in the quarter for all of food, clothing, household goods and department stores. On the food side, supermarket wars have driven price deflation but analysts suggest this may be coming to an end. Meanwhile, clothing prices have fallen for four straight quarters.

And Amazon isn’t even here yet.

On the release of the data, the Aussie plunged. It is down -0.9% since Friday morning at US$0.7647. The stock market wobbled, but only briefly.

The ASX200 opened with a healthy gain on Friday morning on another positive lead from Wall Street. A high of 5968 was hit at lunchtime before typical pre-weekend book squaring kicked in and ten points were given back by the close. But the mood remains positive at this stage. The question remains as to whether we can reach 6000 before everyone becomes distracted tomorrow afternoon.

The futures were up 16 points on Saturday morning.

Only one sector finished in the red on Friday and that was consumer staples, but only by -0.1%. Consumer discretionary managed to rise 0.5% despite the weak sales numbers. Indeed most sectors rose by roughly the same, suggesting market buying.

The exceptions were consumer staples, flat telcos and flat IT. Otherwise, materials led the charge with a 0.8% gain and the banks had a better session post the National Bank ((NAB)) result, rising 0.4%.

There is talk of the RBA being forced into a more dovish stance at its meeting tomorrow, given weak CPI data followed up by weak retail sales data. The ABS is also going to announce a rejig of its CPI model today which is anticipated to be a disinflationary adjustment. But the RBA has been a lot more upbeat than economists of late with regard the Australian economy, and is in no mind to cut rates given the aforementioned high levels of household debt.

The X Factor

Apple posted a solid earnings beat on Friday night but the greater focus of Wall Street’s attention were reports of lengthy queues outside Apple stores as devotees lined up to buy a new iPhone X on day one. Apple shares rose 2.6% to a new all-time high.

There had been some expectation Apple’s result would not be that flash given sales of the new iPhone 8, released a couple of months ago, had been sluggish. This could clearly have reflected potential buyers waiting instead for the iPhone X, but at a price of US$1000, there was concern the X would not be as big of a hit as earlier iPhone releases.

Well, none of the above has played out, it seems. Apple still beat on earnings and the X is flying out the doors.

In other tech market news on Friday, rumours circulated that chipmaker Broadcom was set to launch a takeover of rival Qualcomm in what would be the biggest tech merger in history. Qualcomm shares rose 12% but Broadcom shares rose 6% (typically the suitor’s shares fall in a takeover) suggesting the market thinks it’s a good idea.

Hence we saw the Nasdaq up 0.7% by the close, with the Dow up 22 points or 0.1% and the S&P splitting the difference with a 0.3% gain to 2587.

Corporate activity always fires up sentiment and there’s been a bit of it about on Wall Street lately. But corporate activity at market highs also suggests the cycle is ageing. We can likely take heart, nonetheless, that given Wall Street’s record breaking run has been a grinding one, variously described as “climbing a wall of worry” and “the most hated bull market in history”, that the “euphoria” stage that typically signals the beginning of the end is yet to be reached.

Wall Street was somewhat disappointed with Friday’s jobs numbers. Expectations were for the -33,000 loss of jobs in September, affected by the hurricanes, to turn into a 325,000 rebound on October. But only 261,000 jobs were added.

However that September number was revised from a -33,000 loss to an 18,000 gain, and August was revised up to a 208,000 gain from 169,000. So on a three month basis, before, during and after the hurricanes, the results are much as hoped. The hurricanes have caused a lot of noise in the numbers.

The US unemployment rate fell to a 17-year low 4.1% from 4.2% in September, but participation dropped. More concerning was a drop in annual wage growth back to 2.4% from what seemed like a light at the end of the tunnel in September at 2.8%.

Again we see hurricane noise at play. Those who lost their jobs during the hurricanes were mostly lower paid wage earners. Their removal from the equation boosted the wage growth result in September. They then went back to work, and the number reset in October.

The jobs report is not expected to make the Fed think twice about hiking in December.

Meanwhile, and noting Big W, for one, should be shot for commencing saturation Christmas advertising beginning in October, all talk in the US is of the upcoming “Black Friday” and Cyber Monday” consumer sprees and just how US retailers might fare. These are the Friday and Monday following Thanksgiving on the Thursday, which is not for two weeks.

Commodities

The US rig count saw its biggest weekly fall in some time last week, dropping 8 rigs to 729. Other than the previous week’s gain of one rig, four of the last five weeks have seen declines.

This has surprised analysts who had all along assumed the determination of Saudi Arabia and Russia to keep production capped would simply be met by rising US shale production as the oil price rose. All evidence is to the contrary. West Texas crude rose US89c on Friday night to US$55.66/bbl.

Not receiving much attention in last week’s proposed US tax package was a scrapping of a government subsidy for buying an electric vehicle. This caused the likes of nickel to blink late last week following solid gains over the week, which were driven by research suggesting there will not be enough battery-related metals in the world to meet growing EV demand.

But nickel managed a 1% gain on Friday night. Aluminium rose 0.5% and lead 1% while zinc fell -1.5% and copper had a rest.

Iron ore rose US10c to US$59.40/t.

The US dollar index rose 0.2% to 94.92 and gold fell -US$5.60 to US$1269.90/oz.

The SPI Overnight closed up 16 points or 0.3%.

The Week Ahead

Cup Day tomorrow, meaning a holiday down Mexico way and a lack of late afternoon trade. The RBA meets to hold a sweep.

Otherwise locally we’ll see ANZ jobs ads today, the construction PMI tomorrow, housing finance numbers on Thursday and the RBA’s quarterly Statement on Monetary Policy on Friday.

The RBNZ holds a policy meeting on Thursday.

China will release October trade numbers on Wednesday and inflation data on Thursday.

It’s a very quiet week data-wise in the US this week, and earnings season is now quietly winding down into its long tail.

On the local stock front, Westpac ((WBC)) will release its earnings report today, as will Orica ((ORI)), while BT Investment Management ((BTT)) will report on Wednesday. Commonwealth Bank ((CBA)) will provide quarterly numbers on Wednesday.

Quarterly updates will also be forthcoming from Janus Henderson ((JHG)), James Hardie ((JHX)) and New Corp ((NWS)) on Thursday and REA Group ((REA)) on Friday.

Fletcher Building ((FBU)) hosts an investor day tomorrow and Santos ((STO)) on Thursday.

There are loads of AGMs this week. Sims Metal Management ((SGM)) is in the frame today.

Rudi will appear on Sky Business on Tuesday at 11.15am, via Skype; on Wednesday he'll host Your Money, Your Call 7-8pm; on Thursday he'll re-appear at noon; he'll repeat the Skype-connection on Friday, probably around 11.15am.

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