Overnight: Auto Relief

By Greg Peel

Lapping up the Bad News

The ASX200 was off to a slow start yesterday, struggling to push higher than up 10 points in the first hour and lacking the exuberance of what was seen as an unconvincing comeback on Wall Street. But that all changed at 11.30.

China reported retail sales growth in April of 7.2% year on year, down from 8.7% in March, missing forecasts of 8.6% and marking the slowest pace of growth since 2003. Beijing is trying to transform China into a consumer economy.

Industrial production grew by 5.4%, down from 8.5% in March, and below 6.5% forecasts. March was seen as a recovery blip following New Year, but forecasters still overshot. Fixed asset investment for the year to April fell to 6.1% when 6.1% was forecast.

Once upon a time, numbers like these would have sent the Australian stock market spiralling. But not now. Now, bad news is good news. The weakness of the April data suggests Beijing has no choice but to up the stimulus.

And that’s good news.

Australian wages grew by 0.5% in the March quarter, below 0.6% expectations. Annual growth nevertheless steadied at 2.3%, matching the December quarter. Making it difficult for the RBA as it ponders a rate cut is that public sector wage growth is now at its lowest level in 19 years, yet private sector growth is at its highest level in four.

But what the result has done is changed any expectations of an RBA rate cut ahead.

And that’s good news.

Aiding the afternoon rally for the ASX200 was thin volume, suggesting traders are moving to the sidelines ahead of Saturday. All sectors closed in the green but it was the biggies that led the charge.

Energy (+1.6%) led the field as US-Iran tensions continue to mount, but materials (+1.3%), healthcare (+1.3%) and staples (+0.7%) chimed in, with help from the banks (+0.4%).

Westpac’s consumer confidence index has ticked up 0.6% to 101.3 this month, holding in the “nervously optimistic” zone. It’s still below the 104.3 level achieved when the government released its early budget – a budget which may be redundant in a few days’ time.

We head into today’s trade with the futures up 14 points, following another intraday turnaround on Wall Street. That turnaround was all to do with auto tariffs. We don’t have an auto industry.

The Cars That Ate Paris

Looming in the background of the now escalated trade war between the US and China has been a deadline for a White House decision on a tariff increase for imported European cars. That deadline is this Saturday.

The plan is to raise the tariff from 2.5% to 20 or maybe 25%.

All the major German manufacturers have plants in the US and fully imported European cars represent only 6.7% of annual US sales. That may not seem like much, but it’s still over US$60bn in value. A tariff increase of that extent would be crippling.

But the White House is somewhat distracted by the more immediate battle with China, hence news is that an allowed 180-day extension to the deadline will be implemented, putting off a European car tariff decision to at least November.

This was enough to turn an opening fall for the Dow of -190 points into a 115 point gain. Not that there are any European car manufacturers in the Dow. It’s again a case of sentiment. And after Europe, Japanese cars were going to be next.

What Wall Street does not want to see is trade wars opening up on all fronts. Not only was this deadline approaching, but Congress is currently in the process of reaching a decision about ratifying Trump’s USMCA trade deal, aka Nafta 2.0.

Thankfully the current dispute with China is only a “squabble”, according to one of the president’s tweets last night. Trump repeated positive expectations with regard his planned hook up with President Xi at the G20 next month.

Squabble or not, trade war fears are driving fears of further global slowing, and that includes the US economy.

US retail sales fell -0.2% in April when a rise of 0.1% was forecast. As is now well documented, money from the China tariffs is not going into the US Treasury, as the president suggests, but coming out of the pockets of US consumers.

US industrial production fell -0.5% in April when -0.1% was expected. Hold these numbers up against the above China equivalent data and one wonders who really is winning this war. Trump assures it’s the US. The numbers suggests the impact is internecine.

And the latest tariff increases are yet to hit the data.

Commodities

Washington has pulled all “non-emergency” personnel out of its embassy in Iraq, as tensions with Iran escalate. There are still US troops and personnel in Iraq, which the Whitehouse fears could become targets of Iran-backed militia.

That news ensured oil prices rose last night, despite further evidence of an ongoing weekly build-up in US crude inventories.

It appears the bad news is good news theme regarding the Chinese data also worked for metals, although copper bucked the trend.

The Aussie continues to slide, this time likely on the wage growth miss. It’s down -0.2% at US$0.6930.

Today

The SPI Overnight closed up 14 points or 0.2%.

Locally, the April jobs numbers are out today. ScoMo will have his fingers crossed, and his toes, and…

Xero ((XRO)) reports earnings today and oOh!media ((OML)) holds its AGM.

Westpac ((WBC)) goes ex-dividend.

Vale Sky Business.

The Australian share market over the past thirty days…