Stocks pullback as earnings season starts slow; Aussie jobs data in focus

Stocks beginning a fresh wave lower

Stocks sold off across the globe and investors have sought safety in government bonds, as upside momentum in global equity indices reverse. The dynamic has been inspired largely by a very tepid start to earnings season in the US; and a growing likelihood the same phenomenon ought soon to be experienced in Europe. The benchmark S&P 500 plunge below psychological-support at 3000 overnight as a result, with losses being sustained in equity markets across Asia and Europe, too. Long term interest rates have fallen as money exits riskier assets: the rate on the benchmark US Treasury note dipped back 5 points to trade at 2.04%.

ASX to fall in line with global theme today

The perhaps surprising exception to yesterday’s general sell-off was the ASX, which managed to recover half-a-percent during local trade. It was a relatively soft day activity-wise yesterday: volumes were below-average, and breadth was underwhelming at 50%. It was one of those days the ASX is wont to have when a rally in bank shares and a few heavy weight large-caps prop-up the whole market, and masked the general bearishness of investors. The ASX this morning ought to fall in line with general realignment going on in global stocks, with SPI Futures suggesting a 10-point drop at the open.

Jobs numbers highlight local trade

Australian market participants will focus their attention on what is the economy’s most significant data point right now: the unemployment rate. Recall, the RBA has put at the centre of its policymaking the matter of “spare-capacity” in the labour market. It’s not until the unemployment rate hits about 4.5% that the RBA believes the economy can be considered running at “full capacity”. The central bank has justified its two-recent interest rate cuts on the basis that looser monetary policy is required to absorb this “spare capacity” – and, in turn, drive the growth in wages, inflation and consumption that the economy is currently missing.

Employment outlook still dim

The problem is, as it stands, the unemployment rate is at a relatively high 5.2%. Of greater concern, it has also begun to shift higher, as economic growth slips to a well-below-trend rate of 1.8%. The growth outlook, to be fair, is expected to pick up, as the slow-burning effects of interest rate cuts filter through the economy. But markets remain hypersensitive to bad news. And given the downward trend in recent economic data, combined with the RBA’s clear readiness to cut rates again if necessary, today’s growth numbers will go some way in determining if and when that might occur.

More to it than just the unemployment rate

The devil will be in the detail, too, because there is more at play than just the headline unemployment print. That matter of “spare capacity” also includes the issue of “underemployment” – which has, despite falls in the unemployment rate in recent years, has kept stubbornly high. The unemployment rate is forecast to print steady today at 5.2%, and the economy is expected to have added a modest 9k jobs last month. But here is the nuance: how many of these will be full time, and how many will be part-time? Last month, most were the latter; policymakers will be hoping we don’t see a repeat performance.

Stocks wish for soft jobs numbers

Investors, perhaps paradoxically, might be hoping for the former, in order to invite the RBA to cut rates again. Having fallen to all-time lows last month, longer-term interest rates have climbed recently, as a slightly improved outlook for the global economy nudge markets into unwinding bets of massive monetary stimulus from the global central bankers. That dynamic has driven money away marginally from Australian stocks, as valuations become relatively less appealing. Hence, market-bulls will likely be hoping for a slight miss in the labour market today to bring forward those bets, and support equity markets.

Australian Dollar in focus

The Australian Dollar will also be in focus, as it holds onto the 0.7000 level, after yesterday’s USD rally. The Aussie has bounced recently, courtesy of an overall weaker greenback, with the US Fed clearly winning the global race to the bottom in devaluing its currency and signalling future rate cuts. That means the Australian Dollar is a US Dollar story, for now. But a global economic slowdown is apparently upon us, and the AUD/USD is approaching a long-term downward trend line. A miss in unemployment numbers today could align the AUD with that trend; a beat could nudge slightly closer to challenging it.