US data to set tone for a bumpy week

Asia has not got off to a good start in November with Australian and Japanese markets seeing the worst of the selling from the open.

Data
Source: Bloomberg

Chinese and Hong Kong markets looked to follow their lead, but the better-than-expected China Caixin Manufacturing PMI saw those markets steadily climb soon after they opened. The unexpectedly hawkish Federal Reserve statement and the Bank of Japan failing to step up its stimulus program does look to have been negative for equity markets in the short term. We are certainly seeing a pull back from the strong October equity rally, although a weak set of US data this week could be taken as a positive if it definitively pushes back expectations for a Fed rate hike into 2016.

The US dollar bounce after the Fed meeting last week does look to be somewhat dissipating. The Aussie dollar and Kiwi have both fully recovered from their Fed-induced drop on Thursday morning.

We are also expecting a raft of important US data this week, with many of the delayed real economy effects from the Q3 selloff likely to bias them to the downside. The US ISM manufacturing PMI will be released this evening with expectations for it to slow to 50.0. However, most of the regional PMIs are already in contractionary territory leading to a high possibility that we could see a number below 50. This would clearly be a negative for the US dollar and the potential for a December rate hike by the Fed.

The rest of the week will also see the release of US motor vehicle sales, the ADP employment report and initial job claims. But the biggest number of the week will be the release of the non-farm payrolls (NFP) number on Friday. Expectations are for October payrolls to increase by 180,000 from 142,000 the previous month. But given that the weakness from Q3 likely takes time to show up in employment data, there does seem to be a high likelihood for NFP to undershoot expectations.

If we do see a disappointing set of US data this week, the market’s current 50% probability for a December rate hike is likely to come down dramatically. This does set the stage for a range of currencies and gold to potentially see a strong rally this week as the December rate hike is quickly put to bed.

China

The National Bureau of Statistics (NBS) PMI data came below expectations over the weekend and unchanged from the previous month at 49.8. While a weak report, the two most important sub-components, output and new orders, both continued in expansionary territory at 52.2 and 50.3, respectively. However, it was a far more positive number from the Caixin PMI, coming in noticeably above expectations for 47.6 at 48.3, its highest since the stock market collapsed in June. Caixin is usually more associated with smaller private sector firms, so to see such a big jump from the multi-year low the previous month is certainly a positive.

The key takeaway from the manufacturing PMIs is that activity in China has stabilised in the wake of significant monetary easing and fiscal spending. This should support a pickup in the last few months of the year, seeing China achieve 'official' GDP growth that is right in line with the 7% target.

However, the non-manufacturing PMI, which encompasses China’s services and construction sector, has seen a marked slowdown. Non-manufacturing slowed to 53.1 from 53.4 the previous month, its lowest reading since January 2009. The ongoing weakness in construction and strength in services makes it difficult to gauge their respective inputs, but a marked slowdown in the services sector in China would be a major concern.

ASX

The ASX has continued to decline for the sixth day in a row, losing 3.7% since its recent high on 23 October. Today’s selloff was driven by the banks again, with investors clearly concerned after seeing the full set of earnings reports from the banks. While profits and revenues by-and-large held up among the Big Four, bad and doubtful debts (BDDs) did continue to pick up. Net interest margins contracted a couple of basis points for NAB and ANZ. And the property clearance rates over the weekend continued to see further air coming out of the Sydney and Melbourne property markets. Growing BDDs, contracting margins and slowing housing growth all cloud the outlook for the banks’ results in FY16, with the heady profits of the past five years looking unlikely to return.

The Banks were the worst performing sector today, losing 2%. While all of the Big Four were down around 2%, the worst of the selling was seen in Macquarie (MQG). MQG lost 5%, as much of the gain following from last week’s strong earnings report was lost today. However, that being said, the drop in bank stocks may entice dividend focussed investors to pick them up at cheaper prices.

The other favourite of dividend-focussed investors, Telstra, also had a difficult day losing 1.8%. Investors have not welcomed news that profits are likely to be impacted over the next few years as Telstra invests in fighting off competitors and financing speculative investments in Asia. The telco sector as a whole lost 1.45%.

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