Overnight: Cheers For The Fed

Wall Street has decided the Fed’s about-face is a good thing while Apple stole the spotlight last night. Dow up 216.

By Greg Peel

Rock & Hard Place

One wonders whether Philip Lowe was secretly hoping yesterday’s job number would be a shocker, thus helping to untangle the conundrum of a tight labour market and slowing economic growth and providing an excuse to move on rates. But no, the unemployment rate fell to an 8-year low 4.9% last month from 5.0% in January. ScoMo will be all over that one.

BiSho on the other hand may choose to unpack the data. The drop in unemployment resulted from an addition of a mere 4,600 jobs, missing forecasts of 15,000. Full-time jobs fell -7,300 leaving the addition of 11,900 part-time jobs to make up the numbers. The unemployment rate fell on lower participation.

An ABC report last night highlighted the sharp downturn in housing construction and its impact on the job flow for builders and tradies. The trajectory is firmly down, and the layoffs are only now beginning to be noted.

However one interprets the result, the labour market is still tight, and the chance of an RBA rate cut still unlikely in the immediate term. Hence the ASX200 fell from slightly positive yesterday at the time of the release to down -30 points by early afternoon.

There was a last half hour rush into the banks, for reasons unknown, and the index ran back to square. In theory an RBA rate cut should benefit the banks, but only if they feel game to reprice their mortgage books when they’re not exactly Mr Popularity right now.

I’d wager last minute buying may have something to do with derivative expiries.

Financials still closed down -0.3%, with the main offset coming from materials (+1.0%) and energy (+0.4). Energy was up on the oil price, which was up on US inventory data and a drop in the greenback post-Fed. Materials rebounded from Wednesday’s losses on a swing-around in iron ore fortunes.

No sooner has Vale been given the green light to recommence production at one of its big mines in Brazil, it has chosen to shut down another one after tests raised concerns over structure stability. The Alegria mine is not far from BHP’s Samarco (jointly owned with Vale).

Consumer discretionary and staples were down -0.4% and -0.3% respectively on faded rate cut hopes because unemployment is annoyingly low. Not sure, nevertheless, whether rising unemployment would do consumer sectors that much good.

At the individual stock level, Nufarm ((NUF)) bounced back 6.1% yesterday after analysts called Wednesday’s sell-off overdone.

No such call for EclipX Group however, and that stock fell a further -12% after losing half its value the day before. Pact Group ((PGH)) lost yet another -7%.

But goodness me if the futures aren’t up a full 42 points this morning, on Wall Street’s rally. The SPI’s predictive track record this week has been, well, zero, but given the ASX200 has drifted around without direction all week, maybe we will see some Friday buying.

The New Ecology

Stop Press: Apple is not a device company, it’s an ecosystem.

So suggested one US analyst in a report last night that upgraded Apple to a Strong Buy. Not realising previously that Apple was actually an ecosystem rather than a device company, Wall Street scrambled to redress that oversight.

Apple shares rose 3.7% as a result, which doesn’t seem like much, but makes a difference when you return to being America’s largest company and you reside in all three major indices and Lord knows how many ETFs. That move is worth over 50 Dow points for starters.

But last night was not just about Apple. I noted yesterday, as I always do, that the real Wall Street reaction to a Fed statement comes the day after, and not in the hour and half of trade left on the day which can be maniacally volatile. Clearly the Smart Money looked at the statement and saw that it was good.

It is being suggested Jerome Powell likely regrets hiking the cash rate in December and claiming the Fed’s balance sheet wind-down was on “autopilot”. For the subsequent about-face is stark, now assuming no rate hikes in 2019 and a cessation of the wind-down in September. Poking fun at the Fed is common, but many find it hard to get past the December stock market swoon as the impetus, or Donald Trump, or both.

We recall that Wednesday night’s statement sparked a big fall in US bond rates, a big fall in the US dollar, and indecision for the stock market before ultimately a weaker close. Well, last night the stock market sorted itself out, the US ten-year yield is unchanged but the US dollar index is right back where it was.

It seemed an “autopilot” response to sell the greenback on increased Fed dovishness, until one considers that the Fed cash rate is 2.25-2.50% when the ECB has zero and the Bank of Japan’s rate is negative and no change to that is apparent any time soon.

Apple’s move appeared to spark up a bit of life in the tech sector in general, sending the Nasdaq up 1.4%. Every S&P500 sector finished in the green bar one. The banks are the losers from Fed dovishness and a flat yield curve.

One US economic data release of note last night was the Conference Board’s leading economic index, which rose 0.2% in February to post its first monthly gain since September.

However, I’ve never much liked this index because one of its main component indicators is the stock market. Stock markets aren’t indicative, they’re psychological.

And in other news, an old favourite returned to the NYSE last night after 34 years in the private equity wilderness. Levi Strauss’ IPO was good for a 32% opening rally. To celebrate the occasion, the NYSE relaxed its “strictly no denim” dress code for the day.

Commodities

The bounce-back in the greenback didn’t seem to overly affect metals prices, and even gold didn’t drop back too much.

Nor did the news of another Vale mine shutdown spark much of a reaction in the iron ore spot price.

Alas, the Aussie had jumped up as the greenback fell on Wednesday night, then jumped up again on yesterday’s jobs numbers, so as the US dollar bounced back last night, the Aussie managed only to end up net flat over 24 hours.

Today

The SPI Overnight closed up 42 points or 0.7%.

The flashers will be out and about across the world today/night with their March PMI estimates.

Atlas Arteria ((ALX)) goes ex today.

The Australian share market over the past thirty days…