By Greg Peel
The local market opened slightly higher on Friday morning before flattening out and looking very “Friday”. Talk around the desks would have been of where best to go for lunch. But then out came Caixin’s China data.
Beijing’s official January manufacturing PMI, published at the usual time of first of the month, showed a slight dip to 51.3 from 51.4 and caused little concern. Caixin waited until the holiday week was over before releasing its own PMI, which showed a more significant drop to 51.0 from 51.9 in December.
That December number had represented the best result in 47 months, in a trend that had been rising. Now a pullback. The Australian stock market was just starting to sell out of resources stocks when the double-whammy came through.
The PBoC announced a hike for its benchmark seven-day interest rate (closest equivalent to cash rates elsewhere) by ten basis points to 2.35%. The rate had not moved from 2.25% since October 2015 and this is the first move up in rates in six years. Suddenly, and without warning, China is in tightening mode.
The assumption is Beijing is acting to stem China’s worrying pace of debt growth. As is evident from Caixin’s PMI, it is not about runaway economic growth. China’s December quarter GDP came in at 6.8% against 6.7% forecast but that’s not a reason to hike rates.
The response in the Australian stock market was swift. Tighter lending conditions imply lower demand for commodities. In an otherwise relatively flat session for the ASX200, the materials sector closed down -2.2% and energy -1.2%. Traders took that money out and put it into the defensives of healthcare (+0.6%), telcos (+0.7%) and utilities (+0.9%).
The Chinese move also took a bit of wind out of the Aussie dollar’s recent run, but only briefly, before the US session opened.
On Friday night, metals prices duly fell although it wasn’t a trashing. Then a strong session on Wall Street changed the mood.
The US added 227,000 new jobs in January to mark the best result in four months, beating expectations of 197,000. The unemployment rate ticked up to 4.8% but this was because the participation rate rose as more people decided it was worth looking for a job again. Wage growth was an anaemic 0.1%.
I suggested last week US jobs reports will likely now be met with more of a shrug than the sort of angst we’ve been used to this past few years, given we’ve seen a changing of the guard in Washington and it’s only early days. But this particular report could not have been much better.
There was a risk that such a “beat” on new jobs could put upward pressure on wages and thus inflation, leading the Fed to raise rates more rapidly than previously assumed and pushing up the US dollar, the strength of which is acting as a headwind for US exporters and multinationals. But to add 227,000 jobs and only see 0.1% wage growth is real cake-and-eat-it-too stuff.
However, the ultimate rise in the Dow of 186 points or 0.9% to regain the 20,000 mark, a 0.7% gain for the S&P to 2297 and a 0.5% gain for the Nasdaq to a new all-time record, was not just about jobs. The jobs report was just the opening support act.
On Friday, Donald Trump signed an executive order directing the Treasury to review Dodd-Frank legislation, which was put in place after the GFC as a response to the banking crisis. While most US bankers agree there needs to be some legislation in place to reduce the risk of another GFC, Dodd-Frank has always been seen by the sector as overbearing and unnecessarily restrictive.
Indeed, there are few who disagree that Dodd-Frank – hastily pushed through in a time of severe crisis – could use a bit of a rethink. What might be a little more concerning is that Trump signed another executive order which will delay the implementation of the so-called “fiduciary rule” – that which requires brokers and investment advisors who handle what we in Australia call superannuation clients to act in the best interest of their clients.
Why “act in the best interest of clients” should require legislation in any jurisdiction is a cause for concern, but clearly legislated punishments are needed to deter the shysters. Either way, Trump’s move on perceived over-regulation in the US banking system had the unsurprising effect on the US financial sector on Friday night. The banks drove Wall Street higher.
This is what, among other things, Wall Street has been waiting for, having become more and more impatient and uneasy as Trump concentrated on killing off free trade, introducing immigration bans (now overturned) and generally pissing off one world leader after another.
Now, about tax reform…
The strong US jobs number might on any other day had sent the greenback higher but with no sign of wage inflation, the dollar index was down -0.1% to 99.76. For metals prices, it was all about the Chinese rate hike, although moves were not dramatic.
Aluminium remained steady on the LME while copper, lead, nickel and zinc all fell -1-2%.
Iron ore awoke from its New Year slumber to fall -US40c to UD$82.00/t.
West Texas crude rose US24c to US$53.83/bbl.
Gold rose US$4.40 to US$1219.40/oz.
The Aussie had come off a little on Friday on China’s news but shot up again when the US jobs report was released. It was 0.3% higher on Saturday morning at US$0.7682.
The SPI Overnight closed up 24 points or 0.4% on Saturday morning.
The Week Ahead
It’s a quiet week for US data releases this week, with the trade balance tomorrow and consumer sentiment on Friday the only highlights. The US earnings season has passed its peak and now heads into its long tail.
The opposite is true in Australia, where this week sees the earnings season ramping up. There are several reports due out this week before the following two weeks see an inundation.
Data-wise, Australia will see retail sales and ANZ job ads today, the construction PMI tomorrow, new home sales on Thursday and housing finance on Friday. The RBA will hold it first meeting for 2017 tomorrow and leave rates on hold, before releasing a quarterly Statement on Monetary Policy on Friday.
Caixin will release its China service sector PMI tomorrow and Beijing will release January trade numbers on Friday.
National Bank ((NAB)) will provide a quarterly update today. Alacer Gold ((AQG)) may report today or, given total disagreement among covering brokers, any day this week.
Rudi is in Perth this week to present to members of the Australian Shareholders Association (ASA) and of the Australian Investors Association (AIA), both on Tuesday. After his return to Sydney he will appear on Sky Business on Thursday at noon.
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