Making sense of the data ..... as with everything else, it can mean different things to different people

Sunday 4th April 2016

Making sense of the data ..... as with everything else, it can mean different things to different people

ref :- "Investors find it hard to know what April Fool's data to believe" , The Long View , FT Weekend

John Authers gives his take on what we should take out of Friday's myriad data releases and more broadly, what this year's market moves are telling us .... Of course, we gave our knee-jerk reaction to the high profile Employment numbers on Friday afternoon and can't see much reason to change it now. Jobs are continuing to be created at a steady pace, and the headline unemployment rate only ticked up because of a jump in the number of people looking for work. If another rise in the "participation rate" that had previously been so feeble could be interpreted as contributing to future wage inflation pressures, it's still some way from being convincing. Overall, one could say these were a respectably solid set of numbers but given the broader global view they present no reason to challenge the Fed's more cautious approach and it's a case of "as you were".

There have been other data releases that should attract out attention, however ..... in particular various ISM manufacturing surveys. These are based on supply managers' opinions and carried out in all of the leading economies, and a reading of above 50 reflects expansion, below 50 reflects contraction. The manufacturing sectors in the world's two largest economies, US and China, have been looking pretty sick recently and some of the more pessimistic commentators have been saying that they point to a recession in the offing. But now comes news that both are expanding again, if only just. We would always caution against reading too much into one set of numbers but this must be welcome news, surely ? Well, yes it is but it looks to be squarely based on foreign exchange movements and needs to be treated in that light.

Some might be surprised how quickly changes in currency levels can translate into manufacturing data, but remember that the ISM surveys are a measure of opinions  --  sentiment, in other words. Thus, this year's weaker dollar (down 4.1%) and the weaker Yuan that is still loosely tied to it seem directly responsible therefore for the increased optimism, just as the stronger Jap Yen and Euro have hurt manufacturing sentiment in their respective areas. The pain that a weaker dollar causes those last two slightly contradicts the growing belief that it's all the result of a silent but coordinated strategy by central banks, but whatever the case emerging markets won't be complaining. The easier terms to dollar debt-laden nations that is the result of a weak greenback means that EM stocks are up 5.5% this year.

Mr Authers points out that whilst long-term interest rates in the form of US Treasuries may have fallen significantly this year (yield on the 10yr 1.77% from 2.27%), many markets are pretty much back where they started (think oil, more of which later). US stocks tanked in January and February only to rally in March, but to post unchanged valuations while rates have fallen so far might be a serious concern and is down to falling expectations of profit growth. Forecast for Q1 have moved from +2.3% to minus 6.9%, and from +7.6% to just +2.0% for the year as a whole.

And then there's Gold .... at up 16% it's undoubtedly a star performer in 2016. Some of that move can be put down to the weaker dollar in which it is quoted, but a good deal of it is essentially a result of the safe-haven factor. Specifically the suggestion is that for gold to perform so well while much else remains unmoved reflects a continuing suspicion that the ability of central banks to influence markets and economies is now strictly limited.

To sum up, according to Mr Authers what does the data tell us about how things have gone so far in 2016 and what should we be looking out for in future ? The central banks HAVE managed to engineer a weaker dollar, and this has staved off advancing recessionary conditions in manufacturing that would be damaging to emerging markets in particular, even while faith in central banks' powers has ebbed. The lack of confidence manifests itself in tumbling profit forecasts and a rising price of gold.

So, above and beyond what we all have to watch on a regular basis, keep a close eye on earnings numbers from US corporates and one more thing ..... the oil price. Rightly or wrongly, oil has become a bellweather for the price of stocks and giving up a chunk of it's recent rally last week, even against a background of a weaker dollar, will be of concern to some. This market is likely to remain EXTREMELY volatile ..... Iran's actions and how others react to them will be key. Expect large (over)reactions to any utterances from oil producers who, incidentally, meet in Doha on April 17th.