Switzer on Saturday

Shock Jobs Report leads to ‘shock’ market reaction

Founder and Publisher of the Switzer Report
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Thursday’s close for Wall Street’s most-watched Dow Jones Industrial Average was a 530-point slumping, making it the worst day since March of last year and completed four days of losses in a row. Then on Friday, along came a bigger-than-expected job creation number, which was bound to bring US rate cut doubters out of the woodwork.

The big headlines from the March Jobs Report are as follows:

  1. 303,000 jobs created!
  2. 200,000 jobs were expected by economists!
  3. Unemployment fell from 3.9% to 3.8%!
  4. Average hourly earnings rose 0.3% for the month and 4.1% from a year ago, and both were in line with Wall Street estimates.

Economist and chief market strategist at New York Life Investments, Lauren Goodwin, summed up the statistics this way: “This is another really strong report…this report and the February report showed some broadening in terms of job creation, which is a very good sign”.

It’s a good omen for the economy and the workforce but it delays rate cuts and could work against stock price rises in the short term.

This is how Paul Ashworth, chief North America economist at Capital Economics, reacted, saying the numbers support “the Fed’s position that the resilience of the economy means it can take its time with rate cuts, which might now not begin until the second half of this year”.

By now, you would have expected that a blockbuster of a jobs number would have led to a fall in US stock prices because it surely delays the first rate cut. But those surprising Americans have done the opposite and bought stocks, big time!

Right now on Wall Street, good economic growth is counting for more than the start of rate cuts because it augurs well for profits, with the first quarter results coming out in ensuing weeks.

And while this great jobs number will affect the timing of the first rate cut in the US, I’m not sure it changes my view that our market could outperform Wall Street in 2024, as we did this week.

Here’s how our respective markets performed this week in pictures/charts.

Dow Jones Industrial Average

But our five-day picture was different, and this contrast could be a sneak preview of what could happen this year. As you can, the US was all red and we’re all green.

S&P/ASX 200

We were up 0.48% for the five days (i.e., Friday to Thursday), while the Dow was down 2.93%. Over the same time, the S&P 500 index was off 1.92% and the Nasdaq gave up 2%.

I expect our market will cop direction from Wall Street’s vibes, but our sell offs could be smaller, and our gains could be bigger, provided China keeps on the mend and commodity prices head up. I’ve made the point on numerous occasions that we have a lot of catching up to do with the US market indexes, with the latter up 24% in 2023, while we were up only 7.8%. However, this possible better rise won’t just happen because our market has lagged. It has underperformed for various reasons, and if those reasons change (such as lower inflation, interest rate cuts and higher export prices for our miners), then we could easily outperform US market indexes.

This week Wall Street was in pre-Jobs Report anxiety mode, which wasn’t helped by Fed boss Jerome Powell being straightforward in telling central bank watchers that while interest rate cuts this year are still on the cards, policymakers need more proof that inflation is heading to the 2% mark.

The bottom line is that when few economists and fund managers can debate that this is happening, rate cuts will begin and there’ll be another leg up for stocks.

I’ve been talking about a likely pullback for US stocks and this from CFRA Research chief investment strategist, Sam Stovall, puts it all in perspective: “Investors right now are sort of taking a wait-and-see attitude. The 10-year yield is the key driving force because of the concern of the Fed implying that they’re in no hurry to cut rates, and therefore confirming the adage that the Fed will be slower to lower interest rates”.

By the way, yields on bonds increased overnight, so these stock index rises do look even more surprising.

Stovall told CNBC that the S&P 500 is expensive, trading at a 33% premium to its long-term average and he added: “I find that to be a bit disconcerting. I think it’s just a matter of time before we end up digesting some of these gains”.

Not helping stocks this week was the growing tension between Israel and Iran and the oil price showed it to the upside. Iran has vowed retaliation over a missile strike on its consulate in Damascus earlier this week, and markets aren’t finding it easy to ignore the potential implications of an Iran-Israel blow up.

Not surprisingly, oil prices have spiked this year, with three months of gains in a row, with US crude adding nearly 21%, while Brent is up 7.7%. This isn’t a good scenario for a world trying to slay the proverbial inflation dragon and hardly adds to overall positivity for stocks.

But all this had been the speculation ahead of the important market watch on the March Jobs Report. When I first saw the numbers, however, I thought: “That can’t be great for stocks in the short term”. Then I countered my own analysis and added: “Stocks could rise on the belief that the post-pandemic US economy, now powered by Artificial Intelligence, can actually grow fast without breeding too high inflation!” This proposition will be tested over the rest of this year and will ultimately control what Wall Street does.

Inflation must keep falling or else optimism will turn to pessimism, with the alarmist suggesting that rate cuts could become rate rises!

To the local story, and the S&P/ASX 200 index gave up 1.57% for the four-day trading week, with tech and material stocks copping it late in the week with all this ‘US rate cuts seem to be delayed’ talk that was powered by Fed officials. They seem committed to ‘jawboning’ the market to hose down expectations of too many cuts, too soon.

Oil had a good week, thanks to the brewing Iran-Israel problem, with Woodside up 0.2% to $30.60 on Friday, as the market dropped 44 points (or 0.56%) to 7777.30. Crude oil futures topped US$91 a barrel, the highest level in five months. Santos put on 0.6% to $7.93. “Oil prices look set for further upside in the short term as a more positive economic backdrop is joined by ongoing supply tightness and rising geopolitical risks,” said ANZ’s oil watching experts.

BHP lost 0.89% on Friday to $44.35, while Rio slipped 1.03% to $120.55. Meanwhile, two fund managers experienced opposite trends. The AFR reported: “Asset manager GQG Partners said its funds under management climbed to US$143.4 billion as of March 31, and investors bid its shares up 4.1 per cent to $2.29.” However, the report added: “Rival stock picker Magellan posted net outflows of $700 million for March. The stock lost 3.7 per cent to $9.49 a share.”

What I liked

  1. The CBA economics team said: “The March Minutes are the most dovish piece of communication from the Board since the RBA commenced its tightening cycle in May 2022. The Board shifted to a neutral policy bias in March. And the Minutes today indicate that the Board did not consider the case to raise the cash rate at the March meeting”.
  2. The CBA economists also said: “We continue to expect the RBA to commence an easing cycle in September.”
  3. San Francisco Fed President, Mary Daly, said that three interest rate reductions this year “is a very reasonable baseline. But growth is going strong, so there’s really no urgency to adjust the rate”. At the beginning of the year, the market tipped seven cuts. While I never believed that, many did!
  4. The ISM index in the US unexpectedly fell 1.2 points to 51.4, largely reflecting a drop in supplier deliveries. The index of prices paid by businesses for inputs dropped to a 4-year low of 53.4, which bodes well for the inflation outlook. The US economy needs to slow to permit the Fed to cut interest rates and the fall in the price of business inputs is a plus for US inflation.
  5. The Caixin composite measure for the purchasing managers’ index (PMI) rose from 52.5 in February to 52.7 in March. The services PMI also lifted by the same amount in the month. We need an improving Chinese economy.
  6. Preliminary figures overnight showed that core consumer prices in the EU rose at an annual rate of 2.9% in March. This is slower than the annual rate of 3.1% in February and below the consensus forecast of 3%.

What I didn’t like

  1. Bond yields in the US pushed higher on the back of stronger-than-expected economic data and hawkish comments from US Fed officials. The 10-year Treasury yield hit its highest level this year and the market has priced in virtually no chance of a rate cut in May.
  2. According to Core Logic, home prices across the combined eight capital cities rose by 0.6% in March 2024, the same pace of gain as February. The pace of gains in 2024 to date has exceeded CBA economists’ expectations. Challenges around housing affordability, the interest rate hiking cycle and the resultant drop in borrower capacity have done little to counteract the large mismatch between supply and demand.
  3. Building approvals fell by 1.9% in February to sit at just 12,520. Private sector house approvals rose by 10.7% in the month. However, this gain was more than outweighed by a 24.9% fall in private multi-unit approvals (i.e., apartments).
  4. This chart, which isn’t a good sign for new properties, house prices, rents, and inflation!

It’s been great for long-term investors!

Expect a good day on Monday for stocks, with the SPI futures forecasting a 38-point jump at the open. I’m not sure how long the current optimism can last, but knowing rate cuts are still likely, when the US economy eventually slows, does make 2024 and even 2025 a good outlook for long-term players. On the other hand, there are bound to be some dramatic moments for short-term speculators but that goes with their patch.

Obviously, the data drops on US inflation will be critically important for stock prices going forward. The first big test will be Thursday, our time, when the Yanks get the March Consumer Price Index to go with the overnight’s Jobs Report. If the number is greater than 0.3%, then that could make life pulsating for short term stock speculators.

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Shorted stocks not updated because of the Easter public holidays.

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before 

 

Quote of the Week

“Prices rose in all capital cities but Darwin over the month, with prices now 11.4% higher than the trough back in January 2023 and 2.4% above the previous record high in April 2022,” said CBA economist Ryan Felsman. “Over the past year Perth (19.8%), Brisbane (15.9%) and Adelaide (15.9%) have led prices higher. More affordable housing relative to Melbourne and Sydney, large net interstate migration flows, as well strong demand from investors have driven performance in these three capital cities. In comparison Sydney has risen by 9.6%, Melbourne by 3.2% while Hobart and Darwin were flat.”

 

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When will this house buying madness stop?

 

 

Disclaimer

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.