Turkey shooting season continued Friday with markets deciding it was time for a bit of weakness in equities and some US dollar strength.
For certain the negativity made sense when you look not just at the print from the Chicago PMI at 49.7, well below the 53 printed previously, the lowest level in 3 years and it now sits in contraction territory. Worse yet was the breakdown of the internals within the index showed that economic weakness is growing yet prices paid are rising. That is a recipe for disaster in any economy – or at least for a dilution of corporate margins at the very least. This piece of data flies in the face of releases earlier in the week of other regional surveys and markets will be desperately hopeful that the NAPM tonight refutes the Chicago PMI and paints it as an outlier.
But on Business Insider over the weekend one of the fellows I reckon is a great market economist – that is he can tie the data to making money rather than just talking about the economics – David Rosenberg wrote:
In his latest Breakfast with Dave note, David Rosenberg points to one sub-component of the durable goods report that sent a particularly scary signal.
The three-month moving average of core capex orders (i.e. nondefense capital goods excluding aircraft) was -4.1 percent in August.
“History shows when the trend weakened to the level we see today, the economy was in recession 100% of the time,” wrote Rosenberg. “So stick that in you pipe and smoke it!”
You know what I think about the data flow in the US and elsewhere and I’d suggest you have a squizz at Macro Investor this week if you want to better understand that it’s not just the data flow but a second derivative that is important – so I don’t disagree with him at all.
Anyway to the markets. The S&P 500 closed down 0.45% to 1440.67, the Dow fell 0.36% and the NASDAQ dropped 0.65%. In truth you’d have to say that this is a pretty good performance given the Chicago PMI and the performance of European stock markets. Quarter end trade is always difficult to gauge and after a poor week it’s hard to know what impact this played on Friday night – did it make the weakness worse or was quarter end buying responsible for the reasonable performance of the US versus Europe?
In Europe markets remain concerned about Spain and the other periphery nations and the release of the Spanish bank audit showing that they needed “only” around €60 billion in recapitalisation funds came after the closing bell and too late to change the feeling that Spain is meandering toward a bail out. Madrid led European bourses lower dropping 1.71%, the DAX fell 1.01% and the FTSE fell 0.65%. In France the release of the budget which raised taxes by around €39 billion weighed on expectations of growth and the CAC dropped 2.5%.
In FX markets it was a tale of more US dollar strength which, as usual corresponded to S&P weakness. It’s a funny correlation that but one that seems to be very strong and holding true. The euro sits at 1.2847 this morning closing in on the very important support we have identified around 1.2800/1.2812. Europe’s woes are generally not good for the single currency and the concerns about Spain and the weak German IFO data on the week have weighed. The Australian dollar has had a round trip from Thursday’s lows to a high around 1.0455 Thursday night and now sits back at 1.0358. Equity market moves will be important as I note in an Aussie dollar piece I’ve written on Macro Business today and the RBA decision tomorrow, what they do and what they say will also be of import.
The Ags were the big movers Friday night with corn, wheat and soybeans up 5.29%, 5.21% and 1.89%. Reuters reported that these gains were on the back of US Government data showing that the stock of corn was 12% lower than a year ago and below 1 billion bushels for the first time in 8 years.
Data: Holiday trade in Australia today but we’ll be watching the Tankan in Japan and TD-MI inflation gauge and Chinese Manufacturing PMI today
And here is how the markets were at Saturday at 6am courtesy of AVATrade
Twitter: Greg McKenna . He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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