The Overnight Report: Two Minds Over Tapering

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December 5, 2013 9:46 AM EST

By Greg Peel

The Dow closed down 24 points or 0.2% while the S&P lost 0.1% to 1792 and the Nasdaq gained 0.1%.

RBA governor Glenn Stevens said in his policy statement on Tuesday that "Further ahead, private demand outside the mining sector is expected to increase at a faster pace, though considerable uncertainty surrounds this outlook". In commenting on yesterday's disappointing September quarter GDP result for Australia, Commonwealth Bank economists noted "The desired growth transition via higher levels of non-mining activity is proceeding only slowly".

And everyone agrees with the RBA's contention that "A lower level of the exchange rate is likely to be needed to achieve balanced growth in the economy".

Well yesterday's GDP result helped. The Aussie is down a cent. Quarter on quarter growth of 0.6% fell short of 0.7% expectations and the annualised growth rate of 2.3% is very much to the sluggish side. Consensus forecasts had an unchanged rate from the June quarter of 2.6%. The longer term trend is 3%, which at the moment seems a long way away. Take out net exports, the bulk of which are minerals, and the Australian economy is stagnant.

CBA believes the RBA will remain in an easing bias.

On a slightly more positive note, Australia's service sector PMI for November rose to 48.9 from 47.9 in October. This still implies contraction, indeed the twenty-second consecutive month thereof, but the pace of contraction is slowing. Survey compiler AiG noted the increase was largely a result of a lift in the employment element. Businesses are feeling more confident about Christmas, AiG suggests.

HSBC's services PMI for China showed a fall to 52.5 from 52.6, largely consistent with Beijing's earlier result of 56.0 down from 56.3.

The eurozone PMI fell to 51.2 from 51.6, providing further evidence Europe is struggling to hang on to recent economic improvement. The UK saw a fall to 60.0 from 62.5, but 60 is a screaming pace of growth and consistent with recent strong UK data. Hopefully Mitchell will wipe the smile off those smug dials this morning.

The US saw a fall to 53.9 from 55.4, leaving only us Aussies to put in the sole positive performance for once.

Sales of new homes in the US jumped by 25.4% to October from September, it was reported. You can't be serious, was a common response. While there was an uproar of disbelief and dismissal in some quarters, others pointed out that these numbers are both highly volatile (August saw a 17% fall) and quite small, thus exacerbating apparent percentage movements.

But the number that actually mattered on the night was the ADP private sector jobs release. Consensus had 178,000 new jobs being added in November, up from 130,000 in October. When the result came out as 215,000 ? the best result all year ? Wall Street initially bought but then threw another taper tantrum. The ADP number has more recently proven a reasonable lead indicator of non-farm payrolls, and jobs are the critical element in Fed policy.

The good-news-is-bad-news cohort did not have it their way for long, nevertheless, before the good-news-is-good-news cavalry rode in. The Dow had been down 120 points at its nadir but recovered to a relatively flat close.

The Fed also released its monthly Beige Book last night, anecdotally deciding little has changed in recent months given the US economic recovery remains "modest to moderate".

A funny thing happened in the gold market. When a positive US manufacturing PMI result was released earlier in the week, gold tanked thirty dollars on the implications for tapering. Last night's ADP jobs number should reinforce tapering expectations, yet gold rallied US$23.80 to US$1246.20/oz.

Gold had traded lower in the European session ahead of the US open, and as far as commentators are concerned had become too oversold. The shorts would have salivated when the jobs number hit the screens, but not for long given some buying emerged. Thereafter followed a short-covering scramble.

Certainly the US dollar had nothing to do with it, as it rose only a tad on its index to 80.65. The US bond market was more in line with tapering expectations, with the ten-year yield adding 7 basis points to 2.84%. The Aussie has dropped 1.1% to US$0.9030, but pretty much all of that fall occurred in the local session as a response to the weak GDP result.

Somebody lit a fire under the LME last night, for once. The conundrum of positive US economic data (eg jobs) is the expectation of offsetting strength in the US dollar which works against metal prices. But it would appear metal traders might also be just a little short, with the ADP number sparking jumps across the spectrum of 1-2%, with copper amongst the two percenters.

Spot iron ore rose US$1.50 to a new three-month high of US$139.70/t.

Last night OPEC decided to leave its members' production quotas unchanged. This led to a US95c fall in Brent crude to US$111.66/bbl. On the other hand, the weekly US inventory data showed the first decline in eleven weeks, leading West Texas up US$1.09 to US$97.13/bbl.

The SPI Overnight rose 5 points.

Today sees the release of Australia's October trade balance while tonight both the ECB and Bank of England hold policy meetings.

Rudi will appear on Sky Business today at noon and again on Switzer TV between 7-8pm.

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