Treasurer Scott Morrison’s budget will dominate the week in finance. (ABC News: Matt Roberts)
A big rebound in the US jobs market had investors thinking weak first quarter GDP numbers were more a paper cut than serious internal bleeding.
That prompted Wall Street to regain not only its vigour, but hit a new record close.
Markets on Friday’s close:
- ASX SPI 200 futures +0.9pc at 5,872
- AUD: 74.18 US cents, 67.44 euro cents, 57.13 British pence, 83.62 Japanese yen, $NZ1.07
- US: Dow Jones +0.3 at 21,006 S&P500 +0.4pc at 2,399 NASDAQ +0.4pc at 5,646
- Europe: FTSE +0.7pc at 7,297 DAX +0.5pc at 17,717 Eurostoxx50 +0.2pc at 3,270
- Commodities: Brent oil +1.5pc at $US49.10/barrel, Gold flat at $US1,227/ounce, Iron ore (Nymex) -2pc at $US63.89/tonne
The benchmark S&P500 closed up 0.4 per cent, a point below 2,400 — a level never before breached — and the tech-centric NASDAQ kept on its merry way of churning out new highs, also up 0.4 per cent.
Europe went along for the ride, and some more — up almost 1 per cent on Friday — goaded by the improved prospects of France voting the pro-Europe Emmanuel Macron into the Elysee Palace.
Buoyed by that wave of buying, weekend futures trading on the ASX SPI200 points to a strong opening, up 0.9 per cent — a big change in sentiment after last week’s 1.5 per cent fall.
The higher-than-expected creation of 211,000 jobs in the US in April, and unemployment dropping back to 4.4 per cent — a rate not seen since just before the GFC a decade ago — virtually guarantees the Fed raising rates again at its June meeting.
Well, that is what the market is betting, pricing in an 83 per cent probability of a 25 basis hike. But as usual, check the product disclosure statement on that.
If there was a glitch in the numbers, it was wage growth again.
In April, average weekly earnings rose 7 cents, and coupled with some downward revisions to earlier months’ figures, annual wage growth fell to 2.5 per cent — the most insipid outcome in almost a year.
Oil up, iron ore down, commodities fragile
Oil and iron ore trod different paths in futures trading on Friday, but they are heading in the same general direction: downhill.
Chinese iron futures tumbled to their lowest point since the start of the year, and the damage could have been far worse if the Government’s stop-loss policy had not kicked in.
The fall of iron ore futures on the Dalian market maxed out at 7.5 per cent, down to $US66.89 a tonne.
A couple of months ago the same contracts were changing hands at around $US100 a tonne, in what is a very high-stakes game of pass the parcel.
Steel futures in Shanghai fell, but not so far (down 2.5 per cent) and coking coal on the Dalian exchange was down the best part of 5 per cent.
It has not been great news for the miners, with BHP Billiton and Rio Tinto down around 5 per cent for the week and Fortescue crunched 9 per cent.
Weak Chinese manufacturing figures during the week did not help, nor did the news that iron ore shipments out of Port Hedland in March were the second largest monthly volume on record.
That is perhaps not the best way of clearing up the record amounts of iron ore mounting up around Chinese docks.
The composition of China’s trade figures on Monday, as well as inflation (Wednesday), will be instructive.
Export growth is expected to be strong (up around 10 per cent), although export order data from the recent manufacturing surveys weren’t jaw-droppingly brilliant.
Imports should be up around 15 per cent, but once again it is important that individual categories point to stronger domestic demand, rather than just mounting commodity stockpiles.
Chinese consumer inflation should edge up, and producer inflation down, reflecting higher food costs and lower commodity prices.
New oil deal being brokered, does it matter?
Oil prices pulled out of their vertiginous dive of recent times on news that the OPEC-Russia pact on production cuts was likely to be extended.
The key global benchmark, Brent crude, popped 1.5 per cent on Friday, but remained below $US50 a barrel and still down almost 20 per cent from its recent high in April.
Reuters reported on a chat it had with Saudi Arabia’s OPEC governor Adeeb Al-Aama, who told the wire service, OPEC and non-OPEC nations were close to agreeing to extend a deal to curb production by 1.8 million barrels per day for another six months to the end of the year.
That whisper is likely to be confirmed, or dismissed, at OPEC’s meeting on May 25. A deeper cut is unlikely.
The bigger question is whether the cuts have been effective at all.
According to one big analyst, with plenty of skin in the game, the answer is, “no, not really”.
“The energy complex is slowly succumbing to an opinion that this year’s OPEC production cuts have been ineffective,” Jim Ritterbusch, boss of the energy advisory firm Ritterbusch & Associates, was reported as saying in a note to clients.
“We feel that the [OPEC] cartel has come to a fork in the road in which the current agreement will be abandoned or steps will need to be taken to double down on current efforts by increasing production curtailments,” he said.
A lot of the trading has been entirely speculative, not related to anything like the physical market.
Reports that at least one of the biggest funds hedging oil has liquidated all its long positions might have the oil bulls feeling a bit queasy.
Federal budget to unleash ‘good debt’ spending
The big item domestically this week is of course the federal budget.
Staring forlornly at the phone, waiting for a leak to come through, hasn’t given this column any greater insight beyond the vast expanses of copy that has already been hammered out on that subject.
So it seems the key points will be a slightly better than previously forecast deficit — around $23 billion — and a quicker return to getting the thing into balance.
The time in getting back to budget neutrality should be shortened with the switch to accrual accounting from cash accounting — separating the recurrent side of the budget from the capital side.
The purse strings should be loosened now we know that there is “good debt” and “bad debt” — so expect lashings of good debt on Tuesday night with funding for a second Sydney airport, and sundry road and rail projects.
“The Government’s differentiation between ‘bad debt’ used to fund current spending and ‘good debt’ used to fund capital works will likely clear the way [for infrastructure spending], and like the NBN Co, this debt won’t show up in the budget accounts,” AMP Capital’s Shane Oliver observed.
The budget has forced the NAB to shift its influential business survey forward to Monday to get a bit of clear air for its release.
It should show things are tracking above average, while Westpac’s consumer survey (Wednesday) is likely to show things are tracking slightly below average. Take your pick.
Building approvals (Monday) are always volatile and may fall, but a few apartment blocks here and a new development site there, and they could jump.
Retail sales (Tuesday) haven’t been brilliant, there’s nothing to suggest that will change.
NAB business survey
Mar: A small bounce expected
Apr: Confidence and conditions likely to remain solid
Apr: ANZ series
Mar: Likely to bounce back from a fall in February
|Wednesday 10/5/17||Consumer confidence||May: Westpac series, is currently marginally pessimistic|
Graincorp half-year results
Underlying net profit of $85 million forecast
Shareholders will be anxious to see how the troubled life business is going
CH: Foreign investment
Apr: There’s been strong growth in imports and exports, but recent manufacturing data weak
US: Wholesale trade
US: Small business sentiment
Mar: Inventories and sales
Apr: Optimism outweighs pessimism
|Wednesday 10/5/17||CH: Inflation||Apr: Both consumer and producer price index data|
|Thursday 11/5/17||NZ: BoNZ rates decision||Official rate likely to be held steady at 1.75pc|
US: Business inventories
Apr: Around 2.4pc YoY
Apr: Not shooting the lights out