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Friday’s non-farm payrolls reiterates how the Fed sees the employment market: ‘[The] range of labour-market indicators suggests that there remains significant underutilization of labour resources.’ Considering the emphasis the Fed puts on wage inflation and the quality of the employment, Friday’s data backs this notion. Average hourly earnings month-on-month fell to 0% and remain lower by historical stands at 2% year-on-year; participation still sits near 1977 levels and the full-time/part-time employment compilation is still favouring part-time work.
Last night’s trade in the US was bolstered by stronger earnings from the likes of Berkshire Hathaway and the ‘lower for longer’ theory. US bonds at the lower end of the yield curve moved higher still overnight, seeing the curve steeping further adding strength to the argument that the market is falling back into line with the Fed’s standing, and that rates are unlikely to move until mid-2015.
What I see as interesting is the reactions of the past three trading days; market pundits have been quick to revert to using terms like ‘bubble’, ‘correction’, ‘overvaluation’ ‘equity crash’ and even ‘the wall of worry is back’.
Just to give a bit of perspective, the biggest loss S&P saw last week (high of the week to the low) was just over 3%; for the week in total it lost 2.1%. 18 months ago a 2% intraday move was almost the norm.
S&P futures are still yet to see a 5% or more pull-back in 126 trading days. This shows that the trend not only isn’t broken, but is still pointing higher; S&P September futures currently sit at 1932, six points below the physical market at 1938.
I reiterate two points: from what I see right now a correction looks unlikely in the interim as the Fed is still well and truly behind everything. October may be a stumbling block as the asset purchase program is wound up in full, but earnings are solid enough to hold the line, as is the US economy and technically the trend are still firmly to the upside (if only by a small margin).
Secondly, I am long volatility and remain a believer that the over-complacency of the last four months which has seen the VIX at 10.2 is too low and a more ‘normal’ trading level of 15 to 16 will start to average out. 10.2 is too low considering the macro events that are coming; put protection will have to increase as investors hedge against risk, however this is a hedging call not a correction theory.
Ahead of the Australian open
Earnings season finally roars into life today with Downer EDI, Transurban and Cochlear releasing full-year numbers. I suspect none will be overly spectacular; however COH will be an interesting one considering it has started to move in 10% ranges on the release of its earnings over the past few years. This has been due to the sluggishness of its Nucleus 5, US and European earnings streams and the ever-increasing competition in this space. This will be one to watch for a possible strong move today.
There is also a plethora of data from Australia today, AiG’s services index, the trade balance and then all AUD currency watchers will turn their attention to Martin Place for the rates decision and statement.
As interesting as these releases will be, there is unlikely to be anything of huge significance from today; rates will remain unchanged and the trade balance is likely to be flat month-on-month considering the slight increase in demand from China being offset by seasonality. The RBA is likely to hold out until Friday’s monetary policy statement to really explain its position so the statement could be a carbon copy of last month’s.
The leads coming from overnight would suggest a positive start, however in the month of July the ASX added 4.4% and we are still ahead of global markets. We therefore are calling the ASX 200 down slightly to 5537.