By Greg Peel

Flat

It was a choppy session on Friday on the local bourse leading ultimately to a flat close. A fairly tight range belied some notable moves in sectors nevertheless.

Winners on the day included industrials (0.7%), utilities (0.7%), telcos (0.3%) and consumer staples (0.3%) while losers included the banks (-0.3%) and materials (-0.5%). Energy closed on a rare 0%. Here we see further evidence of a reversal of the theme of the past few weeks in which overbought yield stocks have been sold off on Fed rate rise expectations and undervalued cyclicals have come back to the fore.

It has been a substantial sell-off in yield stocks, and thus no surprise some consolidation has eventuated. But interestingly the initial trigger for the reversal of prior rotation was China’s trade data last week which surprised to the downside, reigniting China slowdown fears and perhaps raising doubts of a Fed rate hike being “baked in”. Friday’s Chinese data release paints a different picture.

China’s CPI rose 1.9% year on year in September having risen only 1.3% in August, beating expectations of +1.6%. But the big news is the PPI, which rose 0.1% to mark its first gain in five years. In August the PPI was down 0.8% and September forecasts had a 0.3% drop.

China’s producer price index had been in the negative since 2012 but recent months have shown it quietly beginning to graft its way back. Last month saw a turning point, which goes some way to relieving fears of Japanese-style entrenched deflation becoming the long term story for China – the twenty-first century’s version of the Japanese economic miracle.

The inflation data provide a little bit of confidence heading into this week’s major data event on Wednesday, which sees September industrial production, retail sales and fixed asset investment numbers along with the September quarter GDP result. Forecasts are for GDP growth to hold steady at 6.7%.

Yellen Gets Hot

While tradition has the Alcoa result signalling the beginning of any US quarterly earnings season, most now consider the real kick-off to be on the subsequent Friday, when all of JP Morgan (Dow), Citigroup and Wells Fargo report. A good result from the banks provides some confidence for the rest of the season.

All three reported earnings beats on Friday night, mostly due to elevated trading volumes in the fixed income market. US bank shares have been in a bit of a push me-pull you lately, on strength from Fed rate hike expectations on the one hand and weakness on European bank fears, Deutsche Bank in particular, on the other.

Friday night also saw all-important US retail sales numbers which showed a 0.6% gain in September. This was a tad shy of 0.7% expectations but not enough to alter any assumptions regarding Fed policy. The US PPI also continues to creep higher, rising 0.3% on the core in September to be 1.5% higher year on year.

Fed watchers may have been jolted, nonetheless, by comments made by Janet Yellen in a speech on Friday night, in which she suggested that in order to reverse the effects of the GFC recession it might be best to run “high pressure” economy with a tight labour market. The way to run a hot economy is, of course, to not fight heat with rate hikes.

December off again? No. Yellen’s supposed paradigm shift simply plays into what she and fellow FOMC members have been stressing for some time – subsequent policy tightening will be very gradual. While central bank preference is to get ahead of any potential inflation spikes, the implication is that a bit of inflation is a good thing in the post-GFC world.

This is longer term good news for the US stock market, and as such the Dow was up as many as 160 points early on. But just as Thursday’s 180 point fall was pared back to only a 45 point fall, Friday’s 160 point gain was ultimately pared back to only a 39 point, or 0.2%, gain. The S&P closed flat at 2132 and the Nasdaq closed flat.

The US dollar index, on the other hand, rose another 0.6% to 98.10. The dollar is quietly becoming what the RBA might call a “complication”, but that’s what you get with a rate rise. Friday’s retail sales and PPI data no doubt helped pushed the greenback along.

And having slipped back on last week’s weak Chinese trade numbers, Friday night saw the US ten-year yield pop up 6 basis points to reclaim 1.79%.

Commodities

The stronger greenback is acting as a drag on commodity prices but demand-supply equations remain the dominant theme.

West Texas crude closed down US16c on Friday night and at once stage dipped below 50, which is one reason Wall Street came off the boil.

Aluminium and copper both fell 1% on the LME but nickel and zinc each rose 0.5%.

Iron ore rose US20c to US$56.80/t.

Gold fell US$5.70 to US$1251.80/oz.

The strong greenback should be good news for the Australian economy by pushing down the Aussie and thus supporting the non-mining economic revival. But it is mining that is enjoying a revival at present – particularly coal – hence the Aussie is up 0.6% at US$0.7610.

The SPI Overnight closed down 9 points on Saturday morning.

The Week Ahead

China’s GDP result, as noted, will take centre stage, but US earnings season will dominate the week as the results start to come thick and fast, including from many Dow components.

There are also a lot of US data releases to mull over this week. Tonight it’s industrial production and the Empire State activity index, Tuesday it’s housing sentiment and the CPI, and Wednesday brings housing starts and the Fed Beige Book. Thursday sees leading economic indicators, existing home sales and the Philadelphia Fed activity index.

The ECB will hold a policy meeting on Thursday night amidst rumours, since quashed but not with any conviction, that QE tapering is being considered.

The minutes of the September RBA meeting are out tomorrow ahead of September jobs data on Thursday.

The local stock market calendar is beginning to fill up once more and this week sees a rush of resource sector production reports alongside various corporate quarterly updates and a building number of AGMs.

Today’s highlights include production reports from Evolution Mining ((EVN)) and Whitehaven Coal ((WHC)) and a quarterly result from James Hardie ((JHX)).

Rudi will appear on Sky Business on Thursday, 12.30-2.30pm, and again on Friday, through Skype-link, to discuss broker calls at around 11.05am.

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By Greg Peel

Rotation

Friday’s trade on the ASX was a bit of a non-event ahead of Friday night’s US jobs number but behind the tepid close we still saw further evidence of investors reallocating their portfolios. The global interest rate cat is out of the bag and not showing any signs of wanting to go back in.

The biggest sector losers on Friday were once again the yield-plays telcos (-1.1%) and utilities (-0.9%), backed up by industrials (-0.5%) where many of the popular reliable-growth-and-yield names reside. On the flipside we saw energy up 0.7% with oil rising over the US$50/bbl mark, underscoring the ongoing move back into cyclicals.

Beyond that, it was all pretty quiet. The US jobs report was going to tell us whether perhaps the Fed might even be forced to raise in November, rather than December, given the urgency that appears to have crept into Fed rhetoric.

Benign

As it was, 156,000 new jobs in September in the US was one of those neither here nor there results. Forecasts were for around 175,000, and the so-called “whisper number” had suggestions as high as 200,000. I’ve never known these whisper numbers to meet their mark.

Had the result indeed been 200,000, then we would all have been talking about the possibility of a November Fed hike. Given it fell short of expectation, that isn’t the case. But the August result was revised up by about as much as the September result missed the forecast, which realistically implies “as expected” all up. That means the market is still assuming a December hike. The futures have this as a 66% chance.

The unemployment rate ticked up to 5.0% from 4.9%. Not so long ago 5% was the Fed’s prime target to trigger monetary tightening but that has since gone out the window on recognition of what that figure does not disclose. It does not disclose the level of long term unemployment – those who aren’t registered as job-seeking – and it does not disclose underemployment – those with a part-time job who’d like more hours. With the participation rate – those trying to find work – at an historical low, the Fed can justifiably point to “slack” in the labour market not revealed by that 5% figure.

And this year we have found Wall Street really not all that fussed about the actual number of jobs added. The number that really matters is wage growth, as it is the indicator of potential inflation – the other prime Fed target. Average wages grew by 0.2% in September to be 2.6% higher year on year. While this is not runaway stuff, the job of a central bank is to act against inflation before it does run away, when it is usually too late.

So put it altogether and Wall Street came out of Friday’s jobs result assuming December is still the date, which is how traders were positioned ahead of the result.

The Dow did initially fall over a hundred points on Friday night to midday. It remains difficult to know whether Wall Street is in a mood of bad news is bad news – i.e. a miss on the jobs number – or bad news is good news – i.e. a less trigger-happy Fed. But Friday’s trade was clouded by an announced earnings guidance downgrade by large cap heavy industrial Honeywell.

With Alcoa’s report tomorrow night unofficially kicking off the September quarter result season, this late “confession session” announcement from Honeywell saw its shares down 8% and shares of all similar companies in aerospace and other big-end industries taking a hit as well. A lot of the morning fall can therefore be attributed to these moves rather than jobs.

And then Wall Street came all the way back in the afternoon before closing only a tad weaker. We would have to think that investors, while not specifically happy with the idea of a December rate rise, are not going to be shocked into selling off if that is to be the case.

There’s still more data to flow before December of course, and the small matter of the US election. The weekend’s developments in the Trump camp had the peso soaring again this morning on the assumption The Donald’s chances are going down the gurgler. At midday Sydney time today the two candidates will hold another debate which, it is being said, will probably decide The Donald’s fate one way or other.

Wall Street is cringing at the thought of a Clinton presidency, four more years of Democrat rule and four more years of Congressional inertia on the assumption the Republicans will still win one or both houses. But more cringe-worthy is Trump. And more frightening.

Commodities

After its solid run up through the 50 mark, West Texas crude pulled back a bit on Friday night, dropping US95c to US$49.58/bbl.

Base metals were again mixed. Copper rose 0.5%, lead rose 1% and nickel fell 1%, with aluminium and zinc little moved.

Iron ore fell US10c to US$54.40/t.

The US dollar also fell back a little, down 0.2% to 96.49 on its index. But gold only managed a US$2.10 gain to US$1256.30/oz.

The Aussie was relatively flat on Saturday morning at US$0.7583 but is a little higher this morning.

The SPI Overnight closed up 8 points on Saturday morning.

On Saturday, Caixin released its take on China service sector PMI for September. It showed a drop to 52.0 from 52.1.

The Week Ahead

The minutes of the September Fed meeting are due on Wednesday. As usual, they will be closely scrutinised.

It’s a quiet week in the US data-wise until we get to Friday, when retail sales, business inventories and fortnightly consumer sentiment numbers are released. Tonight in the US is a quasi-public holiday for Columbus Day. The stock and commodity markets are open but with banks and bond markets closed, activity will be limited.

That will provide more time to discuss today’s debate.

Japan is closed today but China is back after its week-long break. Chinese trade numbers are due on Thursday and inflation on Friday.

Locally we’ll see data for housing finance and housing affordability tomorrow along with NAB’s monthly business confidence survey. Wednesday it’s Westpac’s monthly consumer confidence survey.

On the local stock front, this week brings the first of the resource sector quarterly production reports. Among those reporting this week are Iluka Resources ((ILU)), South32 ((S32)) and Whitehaven Coal ((WHC)), all on Thursday.

We are also now seeing the AGM season start to ramp up. Telstra ((TLS)) will meet tomorrow and CSL ((CSL)) on Wednesday.

Rudi will appear on Sky Business on Tuesday morning, via Skype-link, at 11.15am to discuss broker calls. On Thursday he'll appear in the studio, 12.20-2.30pm and he'll repeat the Skype-link again on Friday, at around 11.10am.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's - see disclaimer on the website)

For further global economic release dates and local company events please refer to the FNArena Calendar.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" - Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com