Overnight: Just a Flesh Wound

By Greg Peel

Stumped

If the local market was looking for a May jobs report that would better inform RBA rate cut speculation, it wasn’t to be. The numbers can be interpreted in different ways.

Firstly, the unemployment rate remained unchanged at 5.2% — didn’t get worse, didn’t get better. But at 42,300, jobs growth was solid. Yet 39,800 of those were part-time jobs and only 2,400 were full-time jobs.

But then the participation rate rose to a record high of 65.9%, which makes an unchanged 5.2% unemployment rate very impressive.

But…and here’s the big but…the election was in May, and elections employ a whole army of people, just for the purpose. So they’ll all drop out in the June numbers.

The bottom line is the numbers don’t much tell us anything, other than employment is not suddenly improving. That would leave RBA rate cut speculation unchanged. But a confused stock market fell on the release from an opening high of up 20 points for the ASX200 back to flat.

The net result may have been a flat close but sectors moves were far from inactive.

Energy was the big negative on the day, falling -2.4% on a plunge in oil prices. The smaller IT sector fell -3.0% after flag bearer Afterpay Touch ((APT)) dropped -12.1% on news AUSTRAC is calling in independent auditors to ensure buy-now-pay-later businesses are conforming with money laundering laws.

Consumer discretionary was slammed a surprising -2.5% — surprising because there seemed to be no specific trigger, unless someone was trying to read something into the jobs numbers. Sector heavyweights such as Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) copped solid selling.

Balancing the above required two stocks that just keep on keeping on, being CSL ((CSL)) and Telstra ((TLS)). Healthcare rose 1.7% and telcos 1.2% while the banks gained 0.5%, possibly on AUSTRAC schadenfreude.

The ASX200 is sitting -24 points below the new post-GFC high made on Wednesday and is likely going to need to consolidate before attempting to push on, if that is to be the case at a time one tweet can ruin your whole day. Sector moves continue to suggest a defensive tone.

Bear in mind we’re nearing EOFY.

We have a data dump from China today which might spark some interest, but even in the case of China it’s now more of a bad news is good news theme given ongoing data weakness simply underscores assumptions of more stimulus to come.

Strong Economy

Once upon a time if an oil tanker was attacked in the Gulf of Oman by one of America’s bitter enemies, the oil price would have shot up 10% and US stock markets, outside of the energy sector, would have panicked. Not so in 2019.

Oil prices did rebound last night from Wednesday night’s steep falls but only by a tepid 2%, despite Secretary of State Mike Pompeo accusing Iran of the tanker attacks.

Over a decade ago when US-Iran tensions were at a height the fear was Iran would close off the Straits of Hormuz and thus block Middle East oil supply from reaching the US or anywhere else. And the prediction was oil would go to US$200/bbl, albeit it was well over US$100 at the time.

Wall Street is not assuming the Straits will be closed and the difference between now and then, and indeed back when the OPEC oil shocks crippled world economies in the seventies, is that the US has more oil than it knows what to do with. That’s why oil prices plunged on Wednesday night – inventory data – and that’s why they didn’t much bounce last night. The US economy is now insulated from supply shocks (as long as they don’t involve Canada and/or Mexico).

Indeed the general consensus is the US economy is in a strong position, which is rather strange when the market is predicting two Fed rate cuts this year. But those predictions lend more to a slowing global economy and an assumption the Fed will maintain the US economy as the “least worst” in such an environment.

Also ensuring the oil price bounce was modest was a coincidental update from OPEC which reduced its global demand forecast to 1.14m barrels per day from a 1.21mbpd forecast last month, mostly reflecting slowing OECD demand.

So instead of panicking, Wall Street rather boldly went back into “risk on” mode last night, albeit modestly, when recently the trend has favoured defensive positioning. Beyond energy, tariff-impacted sectors led indices higher – retail, big industrials and chips.

This reflects an ongoing, seemingly Pollyanna belief that the US will indeed reach a trade resolution with China.

We can still now only wait for the G20 meeting.

Commodities

If the US stock market decided to get more risk friendly then the opposite was true in “safe haven” markets. The US ten-year yield fell -4 basis points to 2.09% and gold shot up over eight bucks.

Base metal markets still look sick but what can we say about iron ore?

Whatever that is, iron ore is not helping the Aussie, which is down -0.2% at US$0.6914.

Today

The SPI Overnight closed up 9 points.

China will release May industrial production, retail sales and fixed asset investment numbers today.

The US will also release numbers for industrial production and retail sales, with the latter being closely watched. Forecasts are for a whopping 0.7% monthly increase.

S&P/ASX will announce quarterly changes to indices today, to become effective next Friday.

OceanaGold ((OGC)) holds its AGM.

The Australian share market over the past thirty days…