The US sharemarket has reversed its “good news is bad news” approach to economic data, at least for the moment, after a raft of improving figures raised hopes that the country was on a sustained path to recovery.
Stocks rallied and the US dollar strengthened following a better-than-expected rise in jobs growth in October, with employers adding 204,000 new positions for the month. The October payrolls data came on the heels of third-quarter US GDP figures that showed growth had risen to 2.8 per cent on an annual basis, up from 2.5 per cent in the second quarter.
Financial markets have reacted negatively to positive signs of economic improvement in recent months, amid fears such figures could bring forward the US Federal Reserve’s plans to wind back its $US85-billion-a-month bond-buying program, which has boosted sharemarkets.
“It’s a departure from the ‘good news is bad news’ mentality that investors have had recently,” FXCM market analyst David de Ferranti said.
“[The data] is bullish for the global growth story, which is bullish for equities, and that’s one reason why we saw a big rally in the S&P500.”
The shift in sentiment could reflect optimism that there has been a fundamental improvement in the US economy, which would support earnings, JBWere executive director Mike Kendall said.
“[The jobs data] was so far in excess of what the market was looking for that I suspect that people thought that maybe the economy is moving forward on a fundamental basis. A lot of the previous reads – while the trend has been there – haven’t been as convincing,” he said.
With expectations increasing that a Fed tapering could come earlier than March 2014, all eyes are set to turn to Janet Yellen. Ms Yellen, the candidate appointed by the White House to succeed Fed chairman Ben Bernanke, will testify in the US on Thursday local time at her confirmation hearing.
“Every single word will be dissected. [Investors] will be looking for a view on [tapering] timing. Whether Yellen actually gives that remains to be seen. But it will be eagerly anticipated,” Mr Kendall said.
Looking ahead, Mr Kendall said the optimism could be sustained if earnings reports in the US and Australia, as well as Christmas trading figures, reflect the bullishness in equity markets.
“There’s been a swing in confidence in the Australian market and economy. All of that is suggesting that the sentiment is much more positive towards equities, and if we start to see it filter through to earnings – with everyone being very aggressive in managing their costs – we could see some nice profit spikes.”
Business confidence reached a new high in October, building on the lift in sentiment following the September federal election, Roy Morgan Research figures released on Monday showed.
The proportion of Australian businesses expecting a positive financial environment rose to 76.7 per cent, the highest since the survey was launched in December 2010.
“While sources such as the Reserve Bank appear to forecast the next 12 months to be particularly tough for Australian businesses, businesses themselves do not appear to share this pessimism,” Roy Morgan business research director Nigel Smith said.
“The retail, accommodation and food services and personal services industries, in particular, have their highest figures we have yet recorded coming into the Christmas season.”
At the same time, a report released by forecaster BIS Shrapnel on Monday said Australia was set to become a more mining-focused economy, not less, despite a peak in the resources investment boom.
The report said mining activity as a share of Australia’s GDP was set to increase from 18.7 per cent to 19.8 per cent.
“With respect to the mining boom, it’s probably fair to say that this is not the beginning of the end, but the end of the beginning,” BIS Shrapnel’s infrastructure and mining senior manager Adrian Hart said.
“Over the next five years, the strong boost from mining production, led by LNG and iron ore, will more than offset the economic negatives from falling mining investment which will flow through to construction and manufacturing.”
Even so, the boost to Australia’s growth would not be matched by a sharp increase in mining jobs, the report said, with resources firms expected to continue to keep a tight rein on costs as the Australian dollar remains at elevated levels and amid lower commodity prices.
“We expect that mining operations employment will rise only 11 per cent over the next five years, mainly in oil and gas and iron ore, whereas mining construction employment will slump 40 per cent,” Mr Hart said.
On Friday, the Reserve Bank said in its quarterly Statement on Monetary Policy that it expected a faster drop-off in mining investment than previously. The central bank lowered its forecasts for Australia’s growth in 2014 by 0.5 percentage points to 2 to 3 per cent.
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