SCOREBOARD: Bernanke drag

Ben Bernanke's fiscal cliff comments spooked the market, destroying the lift from strong housing starts.

Last night’s session wasn’t looking too bad initially. European stocks pushed higher with the Dax and the CaC up another 0.7 per cent, while the FTSE rose 0.2 per cent. Then on the open, Wall Street followed suit – everything was looking just swell, the pice de rsistance coming when housing starts surged another 3.6 per cent in October after a 15 per cent spike the month prior.

Strong stuff, although at 866,000 we’re looking at starts some two-thirds of what a ‘normal’ number of starts would be. Still, that is exceptional growth, adding to the strong recovery underway in the US, which is so far proving to be one of the best recoveries on record, according to the stats. The idea that it is one of the slowest recoveries relies on flawed analysis – it’s simply wrong.

Cue Fed Chair Ben Bernanke, who gave what can only be viewed as a sentiment destroying speech, as is the way of politicians and policy makers these days. Seems they're doing their best to keep the fear alive. I should mention at the outset that he ended the speech saying 2013 could be a very good year. A token gesture thrown in by his PR people, perhaps, because the rest of the speech was soul destroying.

If there was anything to take out of it it’s that they ain’t done printin’. But then we all know that. It was all the doom and gloom that he used to justify it that spooked people. Bernanke suggested that the unemployment rate was still well above its long-term sustainable level (2.5 percentage points above it, apparently) and noted that it would be a long time before the labour market could be regarded as healthy. On the fiscal cliff, Bernanke is of the view that going over it would cause a recession and that it’s a "substantial threat”, although if you do the math this isn’t a conclusion anyone could reasonably draw in my opinion. It's equivalent to saying that a small increase in the federal funds rate from zero would cause a huge recession, which is simply ridiculous. On that logic, rates will never lift – ever – because they would pose a substantial threat and cause a recession without massively stimulatory fiscal policy to offset it.

Anyway, a huge loss by software company Hewlett Packard also weighed on stocks and as I write (with just over an hour to go) the S&P500 was off 0.2 per cent (1383) with the Dow down 45 points (12750) and the Nasdaq off 0.4 per cent (2904). Certainly tech stocks were the key underperformer at the time of writing, although energy stocks weren’t too far behind. That’s due to a 2.8 per cent fall in crude overnight to $86.8 as Hamas said a cease fire deal was close. Gold was then off about $8 ($1726), while copper fell 0.2 per cent.

Price action elsewhere was nondescript. US treasuries sold off but moves were small. So the 10-year yield rose almost 3bps to 1.66 per cent, the 5-year is at 0/65 per cent while the 2-year sits at 0.26 per cent. Aussie futures did little, with the 3s off 3 ticks (97.38), while the 10s fell 1 tick (96.91). For forex, the Australian dollar is down 40 pips to 1.0368 and the euro is little changed at 1.2801.

As for other news, there wasn’t much. Greece looks like it’ll get that €44 billion it so desperately needs – not that it was ever really in doubt. Spanish and Italian 10-year bonds reacted positively to the news though, falling about 7-8bps a piece (5.82 per cent and 4.79 per cent).

So then to the domestic policy front. "We might, but we might not either" seems to be the message the Reserve Bank is trying to get across. Certainly the minutes yesterday made it clear that "a further easing may be required at some point” and Governor Glenn Stevens went on to reiterate that in a speech last night. "The board was also conscious, though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while," he said. "In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still for the moment. Looking ahead, the question we will be asking is whether the current settings will appropriately foster conditions that will be consistent with our objectives – sustainable growth and inflation at 2-3 per cent”.

That reads to me like they could be on hold for some time to await further data. Certainly December is not a fait accompli by the sounds of things – we don’t get any inflation data. More to the point, though, the board would do well to listen to wiser heads. The chairman of Fletcher Building, Ralph Walters, said just recently at the company's AGM: "We do not believe that the easing of interest rates by the Reserve Bank of Australia will be sufficient, in and of itself, to significantly improve consumer confidence in the short term…a sustained improvement in consumer confidence is, in our view, a necessary prerequisite for a substantial pick-up in new home construction.”

I’ve made the same point myself and the fact is, when the Reserve Bank cuts confidence deteriorates. When they held in November confidence surged. This is a terrible way to conduct policy when the price of money isn’t the problem in this economy. Our confidence problems are much more complicated – reflecting the focus on spin, the very low quality of policy debate and exceptionally poor leadership, especially in the business community. There are many large businesses which are trying to blame macroeconomic policy settings for their woes, rather than acknowledge poor decision making. This is especially so in the retail space.

Looking at the day ahead, the SPI suggests the All Ords might be flat today and with no data to speak of, either in Australia or elsewhere, it could be boring. US data tonight includes the usual weekly indicators – jobless claims, mortgage applications as well as the final estimate of consumer confidence (as measure by Michigan Uni).

Hope you have a great day…

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