We finished on Friday with US stock indices at all-time highs, riding the crest of a wave initiated by the Bank of Japan’s surprise announcement of additional stimulus
By Peter Martin
Tuesday, November 4, 2014
The rally has continued on Monday, with prices kept buoyant by the continued strength of earnings. Close to three quarters of the companies in the S&P 500 index have already reported this earnings season, with more than three quarters of those having beaten expectations for earnings.
By mid-afternoon in New York, the Dow Jones was up 0.06% or 10 points at 17,400, having earlier set a new intraday record of 17,410.65. The S&P 500 index gained 0.22% or 4.5 points to 2022.6, having been as high as 2024.46 earlier, also an all-time high.
Questions over manufacturing strength
There were conflicting indications given today for how US manufacturing fared in October by the two most widely followed reports for the sector. According to Markit’s manufacturing PMI, growth slowed last month, with the index slipping to 55.9 from the flash reading of 56.2 and substantially lower than September’s final reading of 57.5. A little ominously, there was notable deceleration in the forward-looking component of new business, which dropped to one of its weakest levels of the year.
The findings of Markit’s report are in contrast to those of the ISM manufacturing index, though. The ISM report suggests growth is accelerating instead. The ISM manufacturing index climbed to 59.0 for October from the 56.6. level seen in September, confounding expectations which had pointed to a drop. New orders increased 5.8 to achieve a very strong reading of 65.8. So, we have two significant reports on the manufacturing sector telling two different stories; perhaps, the truth may lie somewhere in between.
In a separate report, construction spending was shown to have shrunk 0.4% in September, with weakness centered around the areas of public spending and private non-residential spending. The consensus estimate had been for a 0.6% rise in overall spending. There was some consolation in August’s spending being upwardly revised from an originally-reported -0.8% to -0.5%, and the fact that private residential spending bounced 0.4% in September following a 0.3% contraction in the month prior. Year-on-year, construction spending was 2.9% higher in September.
Monetary policy outlook boosts dollar
In the forex market, we have seen a continuation today of the dollar strength that we were seeing on Friday, as market participants consider the differing trajectories of monetary policies from the major central banks. The Fed announced an end to stimulus at its FOMC meeting last week and was upbeat in its analysis of the US labor market, making the next big question when the central bank will choose to hike rates. The Bank of Japan, on the other hand, far from considering winding down stimulus, has just begun to expand its QE. USD/JPY rose sharply on Friday and we have seen another steep move in the same direction today, with the currency pair climbing 1.23% to 113.71. The day’s high of 114.22 is the strongest the dollar has been against the yen since December 2007.
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