There has been a shocker of a US jobs report and the question is: how scared should we be?
With three hours to trade, the Dow was down 155 points (or 0.6%), which is a non-panic reaction but let’s see how the most watched index closes.
The first week in March has put the issue of not just Aussie but global economic weakness on the top of the worry list. And what’s developing is making a lot of people wonder whether they should stay long stocks.
I think we have one month left before sentiment turns grossly negative or the faith in the economic and stock market story is sustained. And not surprisingly, Donald Trump will be an important player, with market rumours telling us that a US-China trade deal will be signed on March 27.
This should be a positive circuit-breaker but it will still need some other positivity-creating trends to help stocks track higher, as there is a belief that a lot of the oomph for share prices has already been factored in. The signing of the trade peace pact could end up being a “buy the rumour, sell the fact” event!
Not helping is this very weak US jobs report with only 20,000 jobs created, when 180,000 were expected. But there is saving grace, which is historical, because with its usual shocking weather, February is seldom good for economic growth and jobs. And then there were the unbelievable 311,000 jobs created in January in the States, which means the three-month average is a very respectable 186,000! “The slowing [in job creation] may reflect some moderation in the trend, but much of it was likely due to payback for exaggerated strength, due in part to weather effects,” said Jim Sullivan, chief U.S. economist at High Frequency Economics.
Meanwhile, Capital Economics argues that the labour market is still tight, with wages rising to 3.4% on an annual basis, up from 3.1% in the prior month.
“With productivity growth also picking up in recent quarters, however, that won’t be enough to generate a pick-up in inflation,” Capital Economics Michael Pearce wrote in a note on Friday. “That frees up the Fed to focus on the incoming data on economic activity, which increasingly reinforce officials’ patient stance.”
As you can see, excuses for soft US data are being accepted but it won’t last if we don’t see supporting or bounce-back data over the next month.
On the positive side, this was Bloomberg’s take: “While the payroll gains disappointed, the report’s other highlights were largely positive: the unemployment rate declined by more than forecast and hourly wages rose from a year earlier at the fastest pace since 2009, figures that bode well for consumer spending. Some industries hit hard in February are typically closely tied to weather patterns, including construction and retail, while the lingering effects of the partial government shutdown may have created some volatility.”
The unemployment rate actually dropped from 4% to 3.8% but you can’t ignore these three crazy job reports of 311,000 last month, December with 227,000 and now February with only 20,000. They must have been influenced by that crazy Government shutdown for 35 days.
And this tweet from the US President reminds us of how crazy times are nowadays: “This is as good a time as I can remember to be an American worker. We have the strongest economy in the world.”
This comes as the world seems to have slowdown stories everywhere nearly every day lately.
China’s notable slowdown on the manufacturing side of the economy has been hard to miss, though the services sector continues to expand. To keep us comfortable about this, Beijing has made undertakings to stimulate the economy more. “Premier Li Keqiang cut the government’s 2019 growth target to 6.0-6.5%, as expected, and promised more stimulus, including cuts in taxes, increases in infrastructure investment, and lending to small firms,” Reuters reported.
To Europe and on Thursday, Reuters reported that the “European Central Bank changed its interest rate guidance and announced a new round of cheap bank loans sooner than expected, though with tougher terms than previous rounds.”
The ECB is now not expecting to hike rates until 2020! Banks fell by 3.3% on the news and it affected our banks on Friday, taking our indexes down as well. The pan-European STOXX600 index fell 0.4% but we lost 1% on Friday as a consequence.
And all this follows our economic growth reality check, with the December growth number coming in at 0.2% but it must be remembered that economists only expected 0.3%, so weakness was predicted.
It led NAB’s economics team to tip that the RBA would cut interest rates in July and November to ensure that our central bank’s best story – the Aussie job creation performance – is sustained.
This is why the month of March becomes critical as the run of economic data will be there for the quarter for the RBA to see for the next interest rate meeting. The trade deal could be signed and pre-Budget rumours will be out there for the April 2 Budget Statement. And the UK could be leaving the EU on March 29 but who knows with this strange Brexit beast!
As you can see, March will be huge and potentially scary so sell offs ahead are believable, but whether there are further legs down or a new uptrend will depend on data and dramas of a political kind.
If you want to believe the bull market still has legs, you might like this realistic take on the recent run of data:
“A pullback in risk assets was needed, but underlying technical and fundamental conditions are positive,” Peter Perkins, partner at MRB Partners in the US, wrote in a note to clients. “The global growth outlook remains mixed, but there are signs that economic growth momentum in China and the euro area is bottoming, while the U.S. economy continues to chug along at a moderately above-potential pace.” (CNBC)
Those who took profit locally yesterday don’t agree with Peter Perkins but our market is up 9.9% since the start of the year, despite the fact that the S&P/ASX 200 index ended the day down 1% at 6203.8.
Given the above, it seems appropriate to warn: “Beware the Ides of March!”
What I liked
- This CommSec take on the RBA’s statement on Tuesday when it didn’t change interest rates: “The Reserve Bank remains sidelined. Continued job market strength is critical to the economic and interest rate outlook. While the Board acknowledged that ‘the slower pace of [economic] growth has continued into 2019’, it still expects ‘growth of around 3 per cent this year’. The Bank continues to note that the labour market is ‘strong’. One key uncertainty is consumer spending, but even on this point the Reserve Bank expects spending to be supported by ‘a pick-up in growth in household income.” Gee, I hope these guys are right!
- Company operating profits rose for the sixth straight quarters, up 0.8% in the December quarter. Profits were up 10.5% on the year. In the year to December, profits hit a record high of $354.6 billion, up 10.6% on a year earlier.
- The trade surplus rose to a two-year high of $4,549 million in January from $3,769 million in December. Exports lifted 5%, outpacing a 3.3% lift in imports, providing a solid start to the March quarter.
- In the year to December, the trade surplus was a record $22.05 billion. As a share of GDP, the trade surplus was 1.8% of GDP – the biggest since 1973.
- International scheduled passenger traffic through Australian airports increased to 3.95 million in December 2018 from 3.83 million in December 2017 – an increase of 3.1%. Passenger traffic over the year to December was a record-high 41.571 million, up by 4.9%
- Council approvals to build new homes rose by 2.5% in January to be down by 28.6% over the year. Approvals remain near 5-year lows. But Tasmanian dwelling approvals are at 7½-year highs. (Gotta hope the housing sector is bottoming).
- Unit labour costs in the US rose 2% in the December quarter (forecast 1.6%), with productivity up 1.9% (forecast 1.6%).
- US consumer credit rose US$17.05 billion in January (forecast US$16 billion).
- The US Federal Reserve Beige Book reported that the economy continued to grow in late January and February, with 10 of the 12 Federal Reserve districts reporting a slight-to-moderate pace of expansion and two saying growth was flat. Wages continued to increase for all skill levels, with a majority of districts reporting moderately higher pay for workers.
- The ISM services index in the US rose from 56.7 to 59.7 in February (forecast 57.3).
- New home sales rose 3.7% to a 7-month high of a 621,000 annual rate (forecast 600,000).
What I didn’t like
- The Australian economy grew by 0.2% in the December quarter (survey: +0.3% after growing 0.3% in the September quarter. Annual economic growth fell from 2.7% to 2.3% (survey: +2.6%).
- Retail trade rose by 0.1% in January.
- In February, 87,102 new vehicles were sold, down by 9.3% over the year. In the 12 months to February, sales totalled 1,137,657 units, down 5.2% on a year ago.
- ANZ job advertisements fell by 0.9% in February. Ads were down by 4.3% over the year and down by 5.1% on 7-year highs set in May. I don’t like the drop but it is off record high levels and current ad levels are still historically high.
- In the US, General Electric shares were down 7.6% after warning about negative cash flow in its businesses.
Who do we believe?
I’d like to share with you two interesting revelations from last week. First, HSBC’s chief economist in Australia, Paul Bloxham, thinks the strong labour market tells us the truer story on the economy rather than the weaker economic growth story. And other economists are siding with him.
Second, one of my team went to an auction in Castle Hill in Sydney, where he and his wife were staggered at the crowd but they were more shocked when the $1 million reserve property went for $400,000 over that reserve! With auction clearance rates on the rise, are we close to a bottom in the house price slump in Sydney and Melbourne? And talk of two interest rate cuts could also help positivity. Given what I’ve written today, we need some help!
The Week in Review:
- Shorten’s threat to franking credits and tax refunds for retirees in SMSFs has led to some ‘experts’ suggesting it’s time to change the way these super trustees invest. But I say: DON’T listen to them, unless your current investment strategy is wrong! And here’s why… [1]
- Do you want to know what the next big thing is? Read Charlie Aitken’s article [2].
- In his second review for 2019, Paul Rickard [3] looked at how our income and growth portfolios performed in February.
- Julia Lee [4] highlighted the sectors and shares that are likely to be impacted by the Federal election.
- The interim profit reporting season confirmed that plenty of companies see favourable growth prospects going forward. James Dunn put together a list [5] of 5 great growth stocks from reporting season
- Tony Featherstone [6] wrote that online and overseas expansion provide tailwinds for growth for these 3 fast foodies
- Automotive Holdings (AHG) was our Hot Stock [7] for this week.
- Downgrades continued to outweigh upgrades in the first Buy, Hold, Sell – what the brokers say [8] this week, while there were seven downgrades and six upgrades in the second edition [9]
- And in Questions of the Week [10], we answered readers’ queries about Tech ETFs, investing in unfranked shares, extra super for the under 35s and another ALP super tax.
Top Stocks – how they fared:
What moved the market?
- The ABS announced that the economy grew by 0.2% in the December quarter, with the annual growth rate dropping to 2.3%.
- The European Central Bank downgraded its growth forecasts and announced a new program to provide loans to banks in the eurozone at cheap rates.
- Chinese Premier Li Keqiang announced that the country’s growth target for 2019 is 6% to 6.5%, lower than the 6.6% growth in 2018.
Calls of the week:
- Nine Entertainment Co (NEC), oOh!Media (OML), Southern Cross Media Group (SXL), Healius (HLS) and Sonic Healthcare (SHL) are among the shares that could benefit from the Federal election according to Julia Lee [4].
- Charlie Aitken [2] wrote that investors should “pay close attention to the products and services your children and grandchildren use”.
The Week Ahead:
Australia
Tuesday March 12 – Speech by Reserve Bank official
Tuesday March 12 – NAB business survey (February)
Tuesday March 12 – Lending (January)
Tuesday March 12 – ANZ-Roy Morgan consumer sentiment
Wednesday March 13 – Monthly consumer confidence (March)
Thursday March 14 – Household & family projections
Friday March 15 – Overseas arrivals/departures (January)
Overseas
Monday March 11 – US Retail sales (January)
Tuesday March 12 – US Consumer prices (February)
Tuesday March 12 – US NFIB business optimism (February)
Wednesday March 13 – US Producer prices (February)
Wednesday March 13 – US Durable goods orders (February)
Thursday March 14 – China activity (Jan/Feb)
Thursday March 14 – US Export & import prices (December)
Thursday March 14 – US New home sales (January)
Friday March 15 – US Industrial production (February)
Friday March 15 – US Consumer sentiment (March)
Friday March 15 – US JOLTS job openings (January)
Friday March 15 – China House prices (February)
Food for thought:
“It takes as much energy to wish as it does to plan.” – Eleanor Roosevelt
Stocks shorted:
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.
Chart of the week:
This week, CommSec’s Ryan Felsman noted: “while annual growth was the slowest in 18 months in the December quarter, the Australian economy has now expanded for 31 consecutive quarters”.
Source: ABS, CommSec
Top 5 most clicked:
- Don’t listen to those who want you to change [1] – Peter Switzer
- Want to know the next big thing? [2] – Charlie Aitken
- 5 great growth stocks from reporting season [5] – James Dunn
- Shares that go up or down because of the Federal election [4] – Julia Lee
- 3 large & tempting fast-food stocks [6] – Tony Featherstone
Recent Switzer Reports:
Monday 4 March: Great growth stocks [11]
Thursday 7 March: The next big thing [12]
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.