Overnight: Paint It Beige

The Dow closed up 2 points while the S&P lost 0.1% to 2096 and the Nasdaq rose 0.3%.

Good News is Bad News

Yesterday’s plunge from the open for the ASX200 may have confused certain ABC finance commentators but I believe the story is pretty clear. The market may have dropped a couple of hours before the strong GDP result was released but the fact is we already knew the GDP result would be strong by virtue of Tuesday’s surprisingly positive net export result.

That result had economists scrambling to upgrade their GDP forecasts from under 3% annual growth to potentially over and guess what, it was 3.1%.

I noted yesterday that May had seen the ASX200 rise from 5250 to 5400. It was not about commodity prices – they rose in April, and while oil has moved little since, iron ore has fallen. This particular increase was all because at the beginning of the month the RBA delivered a surprise rate cut thanks to the March quarter disinflation shock, which again had economists scrambling, this time to lower their cash rate expectations and predict 1.00% by next year.

The May rally was thus led by the banks and other yield-payers. Yesterday’s strong GDP result, coming off the back of the strong December quarter result, now has economists questioning whether 1.00% is at all possible. Suddenly the yield-payers are not as attractive as they were last week. On Tuesday local investors started to sell these sectors in response to the export data, while the significant cohort of offshore investors in Australian yield slept. Overnight, offshore investors had the chance to place their “sell on open” orders ready for yesterday morning.

So down we went. There was a brief “buy the fact” rebound when the actual GDP result was released, but then the Chinese PMI results for May were released.

Beijing had the manufacturing PMI unchanged at 50.1. Caixin’s equivalent fell to 49.2 from 49.4. Beijing’s services PMI fell to 53.1 from 53.5. Caixin’s equivalent is due out tomorrow. For a brief couple of months the Chinese economy looked like it might have bottomed out, ahead of a stimulus-fuelled recovery. But as I had pointed out at the time: never trust the numbers around Chinese New Year.

Suffice to say the ASX200 fell again in the afternoon. The resource sectors joined in thanks to the China data, but we had lower oil and iron ore prices from the outset anyway. Any attempt by the ASX200 to conquer 5400 and push back up towards 6000 again appears now to have been postponed.

Or has it?

Economists agree the GDP result is unusual, and misleading. In short, the strong growth rate comes down to an increase in the volume of output, not the value. On the one hand, lower commodity prices had stripped export volumes of that value. On the other, wages growth is at its slowest pace since the Keating recession and inflation is also slowing. The official unemployment rate is surprisingly low but only because the official unemployment rate is a joke. The vast number of Australians who’ve given up looking for work are the ones ensuring there is no inflation in this country.

Does this, therefore, mean the RBA can keep cutting? That will be the question for June.

Modesty

When the numbers start to become misleading, analysts like to actually get out into the real world to get a handle on what’s actually going on. A good example of this is the Fed’s Beige Book – an anecdotal assessment of economic activity in the twelve Fed districts.

If yesterday’s Australian GDP brought into question further RBA rate cuts, last night’s Beige Book brought into question the June or July Fed rate hike Wall Street has all but come to assume. It was a Triple-M result – growth in each district was either “moderate”, “modest”, or “minimal”. If anything, the US economy has slowed since the last anecdotal assessment.

So maybe the Fed won’t hike after all. How does one respond?

Well it is no longer clear – on Wall Street at least – whether bad news is bad news or good news, or vice versa. Which probably explains why the Dow initially fell over a hundred points before recovering all of that loss by the close. I’ve made the reference before but it’s fitting once again – if this was QI, now’s the time to hold up your “Nobody Knows” card.

On the positive side, the US manufacturing PMI for May rose to 51.3 from 50.8. But while this is an improvement, it still suggests a very “modest” pace of growth. Not the stuff of rate hikes. Meanwhile, the pace of auto sales also slowed in May and construction dropped 1.8% in April.

To further complicate matters, the S&P500 index has had a couple of goes at the technically important 2100 level but failed to breach it. Just like the ASX200 keeps failing at 5400.

Attention now turns to the data biggie, being tomorrow night’s US non-farm payrolls report. Tonight sees the private sector precursor. I apologise for assuming that report was due last night, on a Wednesday as always, but the long weekend has knocked it back by a day.

Commodities

The US dollar index fell for a change last night, down 0.6% to 95.4, thanks to the Beige Book. That should be supportive of commodity prices, but the implications of a slower than assumed US economy, and disappointing Chinese data, should do the opposite. In short, there was no clear trend last night.

West Texas crude is little changed at US$48.91/bbl.

Copper fell over a percent when all other base metals rose, including zinc by 2.5%.

Iron ore fell US30c to US$49.30/t.

Gold is down slightly at US$1212.70/oz.

The Aussie dollar initially shot up on the GDP result yesterday, was then sold back down by those who bought it on the export number the day before, and rose again last night thanks to the weaker greenback. It’s up 0.3% over 24 hours at US$0.7255.

Today

The SPI Overnight closed up 3 points.

With the March quarter now put to bed, today brings local the retail sales numbers and trade balance for April.

The ECB holds a policy meeting tonight.

The ADP private sector jobs number for May is out in the US.

Challenger (CGF) will hold an investor day today.

Rudi will make his weekly appearance on Sky Business today, 12.30-2.30pm and then returns for an interview on Switzer TV between 7-8pm.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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