Market Update November 4

US manufacturing activity accelerated sharply in October with the ISM’s PMI gauge rising to 59.0. The reading, the equal-highest level seen since February 2011, was far stronger than the 56.6 figure of September and expectations for a decline to 56.1. 8 of 10 survey components registered improvements during the month with new orders, a good lead indicator for future activity, surging to 65.8, the second-highest level seen since August 2008. While not as strong as the ISM gauge, the separate Markit PMI survey came in at 55.9, well above the 50 level that separates expansion from contraction, although it was below the 56.2 figure previously reported in September.

US construction spending fell for a second-consecutive month in September, the first time this has been seen since early 2013, with a decline of 0.4% reported. The reading, higher than the upwardly-revised 0.5% drop of August but below expectations for an increase of 0.7%, was led by weakness in public works (-1.3%), primarily in non-residential building, with private sector construction falling 0.1%, again on weakness in non-residential works.

Richard Fisher, Dallas Fed President and noted policy hawk, delivered another speech full of interesting titbits overnight. While he was his usual self on the domestic economy – the labour market is strengthening and inflation is trending back towards the Fed’s 2% target, scenarios that led to the hawkish turn during their October policy meeting, he saved his best work for discussing QE3, stating that the program was behind the ‘reach for yield’ in higher-risk assets and was essentially a gift to the rich. He also noted that the Fed needs to be wary of creating a belief in a ‘Yellen put’. While I agree with his assessment on QE3, given the reaction to James Bullard’s comments at the depths of the recent market rout, it’s safe to say the ‘Yellen put’ is already a reality, not something that could develop.

Canada manufacturing activity expanded strongly in October with the RBC PMI survey rising to 55.3. The reading, the highest level achieved since November 2013, was an improvement on the 53.5 level previously reported in September.

Eurozone manufacturing activity accelerated slightly in October with Markit’s PMI gauge rising to 50.6. While higher than the 50.3 figure of September, the result was slightly below the 50.7 flash estimate released in late October. To view the full report from Markit click here. To see the performance of the Eurozone’s ‘Big 4, Germany, France, Italy and Spain, see below for more details.

Germany: 51.4 (Flash 51.8, Prior 49.9, Forecast 51.8)

France: 48.5 (Flash 47.3, Prior 48.8, Forecast 47.3)

Italy: 49.0 (Prior 50.7, Forecast 50.6 – 17-month low)

Spain: 52.6 (Prior 52.6, Forecast 52.3)

UK manufacturing activity accelerated sharply in October with the Markit/CIPS PMI gauge rising to 53.2. The reading, the highest level seen since July, was ahead of the 51.2 figure of September and expectations for a decline to 51.4. Perhaps illustrating the divergent economic performance between the UK and Eurozone, new orders surged to 54.6 from 50.3, largely as a result of strong domestic demand, while export orders fell to 48.3 from 49.6, the lowest level seen since January 2013.


The Day Ahead (AEDT)

The Australian stock market looks set to start the session fractionally in the red with SPI futures pointing to a decline of 3pts on the open. With most of the market focused on a horse race rather than stocks perhaps it’s best to go to the odds for direction. On seven of the past ten Melbourne Cups the ASX 200 has finished higher. Of the three that didn’t all occurred in years of financial crises (2008, 2009, 2011). When it has finished higher the average gain has been 0.35%. With no crisis looming down the straight a session of wafty gains on the back if low volumes looks the favourite.

The AUDUSD has fallen heavily yet again overnight, largely on the back of continued USD strength thanks to ongoing buying in USDJPY, with the pair currently fetching .8682. With the Aussie already under significant pressure the triple-whammy of major domestic data at 11.30am, retail sales, international trade and revised labour force numbers, along with the RBA policy statement at 2.30pm, have the potential to send the pair hurtling higher or lower depending on their content. While it’s hard to pass judgement on the data side of things, particularly the labour statistics, I’m not expecting the RBA to take a leaf out of the Bank of Japan or Reserve Bank of New Zealand policy playbook by making any substantial changes to their policy statement post the cessation of QE3 in the States. Support is found at .8678, .8652 and at .8643 with resistance kicking in at .8700, .8720 and again at .8750.

The RBA announce their November monetary policy decision at 2.30pm this afternoon.

Domestic data releases today include retail sales and international trade for September along with the weekly ANZ-Roy Morgan consumer confidence survey. Markets are looking for retail sales to have increased 0.3%, up on the 0.1% rate of August, although the trade deficit is expected to deteriorate significantly to $1.775b from $787m seen previously. As an added bonus we’ll also receive revised labour force statistics from the ABS, using new seasonality methods, for the period spanning December 2013 through to September 2013 at 11.30am. Given this essentially replaces the previous data it will likely add to volatility generated by the retail sales and trade data.

Regional data releases today include Japanese manufacturing PMI, South Korean CPI along with the latest ANZ commodity price index from New Zealand. Later in the evening we’ll also receive factory orders, trade and the latest ISM New York index from the States, PPI and updated economic forecasts from the Eurozone along with construction PMI from the UK.


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