SCOREBOARD: Bernanke boost
Fed chairman, 'helicopter Ben' Bernanke, has promised low interest rates are here to stay leading to optimism in the markets.
He effectively reassured the market that low interest rates would be around for some time and again expressed some scepticism that the labour market recovery was as good as indicated. He noted that the drop in the unemployment rate was "out of synch” with the rather modest pace of the expansion and said that further improvements would require a more rapid expansion of growth.
I’ve outlined before why this assessment is wrong – especially when talking about momentum, where some people have said you need growth of 4 to 5 per cent to see a sustained improvement in employment. I’ve gone though that before though and won’t do so again today. For today, and at a very simple level, I would just note that the level of activity, generally, is now higher than what it was prior to the GFC, and yet payrolls are lower – to the tune of millions of jobs. There is a long way to go in this jobs recovery. And firms are cashed up big time.
Helicopter Ben won’t have any of it though and plenty of people have built QE3 into their assumptions, which is the right way to think for mine. PIMCO even reckon that Bernanke will hint at QE3 in April, apparently. In any case US equities shot up at the open and continued to push higher for the session. At the close the S&P was up 1.4 per cent (1416) with healthcare, tech and consumer services the key outperformers although all stocks rose. The Dow was then up 160 points (13241), the Nasdaq rose 1.8 per cent (3122) while the SPI was 1.1 per cent higher (4318).
Metals also had a good session and gold was almost $30 higher to $1692, silver rose 1.5 per cent and copper was 2 per cent higher. Crude was a bit more subdued than that and part of the problem here is that oil is under the spotlight. Cue jawboning politicians in the UK and US who leaked they were considering releasing oil from strategic reserves. Cue commentary from Saudi Arabia that they can lift output 25 per cent – if they want. There are also calls to curb speculation in this market by some US congressmen and so all of that makes investors nervous. WTI put only 0.2 per cent ($107.07) and Brent was 0.4 per cent higher ($125.6).
Now I should mention that not all of this optimism was due to Ben. The Europeans had their own good news flow and the added advantage of another solid print from the well respected German IFO survey. The business climate index barely moved, sure – up to 109.8 from 109.7. But the point is this is well above average (101) and it has held solidly around these levels for most of the last year. The assessment of current conditions is high (117 versus an average of 101) and expectations are just above average at 102 (versus 100). Then German Chancellor Angela Merkel threw her support behind, dropped her opposition to is probably more accurate, combining the European bailout funds. It is widely expected they will be combined following an EU finance ministers meeting this Friday/Saturday.
Euro put on a big figure as a result and now sits at 1.3362 – partly good European news flow and partly Ben's suggestion that low rates will be needed for a long time yet. That’s why we saw the Australian dollar shoot up as well (about 90 pips to 1.0538). Sterling was also 90 pips higher to 1.5973, while yen was little changed at 82.82.
Finally on the debt side, yields were little changed with the 10-year down 1 basis point to 2.24 per cent (high of 2.29 per cent), the 5-year yield was less than a basis points lower at 1.079 per cent (6 basis points range), while the 2-year was bit lower as well at 0.343 per cent. Aussie futures were off a tick or two with the 3s at 96.31 and the 10s 95.76.
Bits and pieces otherwise, the Chicago Fed activity index fell to negative 0.09 in February from 0.22 (average negative 0.39), while the Dallas Fed manufacturing index fell to 10.8 in March from 17.8 (average 2). Still in the US, the pending home sales index fell 0.05 per cent in February after a 2 per cent rise, while Philly Fed President Plosser (non-voter) said that the boundaries between monetary and fiscal policy had been breached and there was no room for further stimulus.
Looking at the day ahead there isn’t really a lot for our region and tonight it’s not much better. US data includes consumer confidence (March), the Richmond Fed manufacturing index (March) and we have a few Fed speakers in Bernanke, NY Fed president William Dudley and Dallas Fed president Richard Fisher.
Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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