Asian shares get JOLTed

Mixed signals from the US Job Openings and Labor Turnover Survey (JOLTS) data have led to renewed volatility in Asia as uncertainty over whether the Fed will hike rates next week gripped markets.

RBA
Source: Bloomberg

The JOLTS job openings came in noticeably above consensus forecasts at 5,753,000. However, other important elements for the Fed were less impressive. The hiring rate eased to 3.5% from a previous 3.7%, and the quit rate was unchanged at 1.9%. The data release provides a familiar lack of clarity over whether the Fed will hike next week, with this probability unchanged at 28%.

The Nikkei has given back almost half of its impressive gains yesterday on renewed concerns about Fed rate hikes. Short positions on the Nikkei dropped to 37.4% on Wednesday after sitting at 41.2% on Tuesday, further demonstrating that yesterday’s rally was driven by short-covering.

China

The continued divergence of monthly CPI and PPI inflation data out of China provides a great insight into the problematic dichotomies of the transition into ‘New Normal’ growth. The CPI number came in ahead of forecasts for 1.8%, growing at 2% year-on-year in August. While the PPI declined for its 42nd straight month, declining 5.9% – far worse than the expectations for a 5.5% decline and its lowest reading since 2009.

The key take away is that inflation will not get in the way of any further monetary policy easing by the People’s Bank of China (PBoC). The increase in the CPI was largely due to the food component, which rose 3.7%, largely off the back of the 16.7% increase in pork prices. However, non-food CPI was flat at 1.1%, and actually eased to 1.8% from 2.0% in annualised quarter-on-quarter terms.

But the 5.9% decline in PPI does serve to underline the severe problems facing China in dealing with its industrial over-capacity. The frequent boosts to Chinese equities by announcements of SOE restructuring and consolidation can distract from the seriousness of the task at hand. China is currently undertaking the largest restructuring of its state-owned sector since the ‘Zhuada Fangxiao’ (literally: ‘grab the big, do away with the small’) reforms of the late-1990s. Those reforms resulted in a vast amount of job losses, a process that is happening again in China, although not reflected well in China’s problematic employment data. The ‘fangxiao’ (do away with the small) component can be most problematic in China, where you have entire townships from the socialist era built around a major industrial factory. The closure of factories not only results in job losses, but also removes the raison d'être for the township in the first place.

The resilience seen in a number of the CPI components does point to strong elements of China’s economy though. The services sector and the Chinese consumer continues to provide strength to the economy in a number of categories. It is these elements of the Chinese economy that are important to the growth story of a number of companies listed on the ASX: Cochlear (COH), Bellamy’s Australia (BAL), Treasury Wines (TWE), CSL, and Blackmores (BKL), among others. These companies all stand to benefit from well executed plays into China’s ‘New Normal’ economy.

While the poor showing of Australian resources and related businesses clearly shows the other side of the coin in China’s transition. Judging by the performance of the PPI, the downturn in China’s industrial sector still has quite a way to run, even with some likely further fiscal boost in the second half of the year.

Australia

The ASX took the poor lead from the US markets overnight and continued to run with it today, falling 2%.

The market was relatively nonplussed by the labour data, although it did provide some strength to the Aussie dollar which rallied 0.6% on the release. The Reserve Bank of Australia (RBA) will be gratified by the unemployment rate shrinking to 6.2% from 6.3%. This means that it is moving back in line with the expectations for the unemployment rate to average around 6% for the next 18 months or so. For those calling for the RBA to cut rates again, attention will now turn to activity data. The RBA expects GDP to grow 2.25% this year. If forthcoming activity data begin to threaten this assumption, speculation on further rate cuts is likely to be seen by further declines in the Aussie dollar.

After a flurry of excitement in the energy sector on Woodside’s (WPL) bid for Oil Search (OSH), the sector has been the worst performer on the ASX down 3.1% on the back of renewed oil price weakness. The prospects for further merger and acquisition (M&A) activity still linger, however, as OSH reportedly met with ExxonMobil this week – its partner in the PNG LNG Project – with many speculating that a competing offer may be forthcoming. This did not seem to buoy OSH’s share price as it declined 3.1%. Recent chatter about asset sales from Santos (STO) also failed to support its shares today as they declined 4.3%.

However, it was the poor showing of the banks that hurt the index the most today. What the banks giveth, they can taketh away. The strong performance of the banking sector yesterday (+3.5%) was a primary factor in driving gains in the index. But that bounce looks like it may have been short-covering related, as banks declined 2.6%.

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