IG Markets - Afternoon thoughts July 12

Across Asia, regional markets are all lower after US markets fell on the release of the FOMC minutes, which suggested the Fed was not imminently considering expanding its balance sheet. The Hang Seng is the region’s worst performer, lower by 1.7%, while the Nikkei is weaker by 1%. Elsewhere, the Kospi and the Shanghai Composite are down by 0.7% and 0.3% respectively.

In Australia, the ASX 200 is currently 0.3% weaker at 4084 having fallen into negative territory after a much weaker-than-expected June employment report. The index had traded as high as 4108, but fell sharply after the employment report revealed 27,000 jobs were lost over the month and the unemployment rate had risen to 5.2% from 5.1%. Despite overnight strength in crude oil prices, the energy sector has given up earlier gains to be 0.1% weaker, while material names continue to be out of favour, with investors clearly nervous ahead of tomorrow’s Chinese GDP print. Once again it is the defensively-positioned healthcare, information technology, telecoms and consumer staples sectors that are outperforming today.

This morning we described the monthly Australian employment report as a bit of ‘chook raffle’, with the number being wildly unpredictable, subject to revisions and more often than not, quite bewildering. A truer statement could not have been uttered. For the last two months, the market’s expectation had been for no jobs to have been created. Last month we had more than 38,000 created, this month we lost 27,000, apparently! The problem with the Australian employment report is that it has nothing to do with actual jobs created or lost in the economy! The number released each month is little more than a ‘spread sheet outcome’ driven by a set of questionable assumptions. Refer to the article: http://www.smh.com.au/national/abs-admits-it-produced-bad-statistics-20120702-21dmc.html There are plenty more like this one.

As a result, market participants in particular, should be very careful trading around ‘consensus’ numbers. To be honest, numbers pedalled out of research houses are little more than a ‘pie in the sky’ guess and had these supposed experts had their money where their mouth is, they would have dusted some serious money! Immediately after the release of the jobs report there was a sharp fall in the AUD as traders started to speculate about further rate cuts. In our opinion this is way too premature and we see the RBA as being on ‘on hold’ for the foreseeable future. While the unemployment rate did rise to 5.2%, this is a number most other first world western economies could only dream about. The same is true for our current GDP growth rate. Given the RBA has already cut rates by 75 basis points over its last three meetings, it is unlikely to move again unless there is a significant deterioration in the local or global economy.
www.igmarkets.com.au

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