Thursday, 19 July 2018

Waiting for the quarter to begin

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  • Peters 475px June 2014

Peters urges caution on payrolls as he waits for the holiday to end

It might already be April 7 but Q2 hasn’t really started. Last week was taken up by the anticipation of Easter – markets were unfathomably quiet – waiting for US March payroll figures and, how else could it be, a goodly dose of Greece watching.

While we Europeans, or at least those amongst us who live in notionally Protestant countries where Good Friday is a public holiday, were sitting at home on Friday freezing our parts off, our American cousins were confused. Good Friday is widely observed in the States and Wall Street is supposedly closed. The Bureau of Labor Statistics, nevertheless, decided to release the March payroll numbers on schedule on Friday morning into a market populated by only the obsessed and the unlucky and what a set of numbers they were.

The headline figure, the change in the Non-Farm Payroll, undershot all expectations at +126,000 as opposed to the consensus forecast of +245,000 and in doing so the economy failed to create above 200,000 jobs for the first time since February 2014. On average over the past 12 months, the increase in jobs has been 269,000 so it’s understandable that such a low number was something of a shock. That said, one swallow a summer does not make and hence the occasional statistical aberration a shift in the trend does not make either. Stock markets were closed when the release hit the screens and although the dollar, oil and bonds did as they would be expected to, equities had to wait until yesterday to have their say. The S&P opened by gapping down from Friday’s close but pretty swiftly reversed and at its high it was up by 20 points on Thursday’s close.

Whether this is more a matter of equity buyers dismissing the payroll report as an aberration or believing the number and deciding that the Fed’s next tightening move really isn’t going to be as early as June, July or September is not easy to tell. Currency markets, which never close, certainly appeared to go with the latter as €/$ leapt a big figure from US$1.09 to US$1.10 which it clung on to through Monday until the Markit US PMI figures were released. They remain strong with the March services PMI reporting in at 59.2 as opposed to the market forecast of 58.6. No signs of weakness there, so we must now sit back and wait patiently for the next Labor Department report in order to establish whether the problem is deep down in the economy or merely in the froth of the statistics.

We can probably look at much of last week’s market activity as playing in the sandbox and although school holidays are not over yet, I’d suspect that this week will be a lot more serious in terms of determining the flavour of the coming quarter. Sure, we’re still left with uncertainty as to what the Fed is thinking – although to be honest, I’m not really sure that it knows quite what it is thinking either. There are also some signs of green shoots in that vast European economic wasteland which need to be priced in but aren’t yet.

My fear is that Europe, having spent the best part of a decade hidden behind so much smoke and so many mirrors, no longer knows which side is up and that it will take quite a while for serious players to take the continent seriously. That does not mean that smart investors won’t be happy to trade the sentiment but serious long term commitment might lack for a while to come and with that market volatility could remain high.

That, quite inevitably, brings me back to Greece. The Athens government has declared that it has the necessary cash to meet its €450m April 9 obligations towards the IMF but the very fact that it is staggering from pay date to pay date does nothing other than to confirm that, without some serious assistance, failure is just a matter of time.

“Please help us out and, incidentally, we’ve worked out on the back of a fag-packet that our claim against Germany for World War II reparations amounts to €278.7bn.” That computes to the minor amount of 8% of that country’s current annual GDP or about 18 months of Greece’s own current annual output. How that figure relates to the 3½ years of occupation from April 1941 until liberation in October 1944 defeats me entirely, but we should surely all be used to Greece’s singularly creative accounting practices by now. Where do they take the time from to work all this out? Perhaps it’s some chaps at the Inland Revenue Service who have nothing better to do because there’s nothing else coming in.

Meanwhile, down under, the Reserve Bank of Australia has defied calls for and market expectations of further monetary easing. The Australian dollar, which has been in more or less one way decline since September and which was below US$0.76 last week, rallied back to close to US$0.77 although there seems to be no conviction that the next rate cut can be too far away.

I’m not sure I entirely agree. The Australian economy is in many respects an adjunct to the Chinese economy and the PBoC is doing more than its fair share to stimulate. Any move by the RBA would have no impact on the China trade and thus might prove to be, in some respects, widdling against the wind. Governor Glenn Stevens looks to be a canny enough chap when it comes to appreciating what the drivers are for the Australian commodities sector and hence for large parts of the rest of the economy. The ailing manufacturing sector needs to re-find its competitiveness. Devaluing the currency even further when it has already lost 7% year-to-date is not the solution. Australia might be the Lucky Country but luck alone is evidently not enough when one is competing in a geographic region of hard work and boundless aspiration. Well done the RBA.

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