Scoreboard: Bright and shiny

Precious metals continued to gleam in the wake of the Fed's decision, though Wall Street was unmoved by rising jobless and home sales data.

Equities may have come off a little bit in the US but commodities continue to surge – gold spiked another $57 to $1365, silver surged another 6.9 per cent and copper was 2 per cent higher. All of course in the aftermath of the Federal Reserve’s decision to delay the taper. Only crude was lower, down 1.8 per cent to $106, but these are either technical or market specific moves. There’s certainly nothing I’ve seen that would otherwise have driven crude prices lower.

In fact it was quite the opposite. Even moves in the equity space were quite bizarre given the economic data. Now none of the data is tier one, but still it shows the US rebound picking up pace and in a normal world that would be bullish for stocks, and crude etc. Firstly, US jobless claims rose to 309k from 294k. That 309k figure is very low however, although many analysts still reckon the figures are being artificially dampened by reporting irregularities. I’m not as convinced as it’s the second week claims stayed near a six year low and the Department of Labor reported no irregularities for this current week.

Then we saw existing home sales were much stronger than expected, rising by 1.7 per cent in August (a 2 per cent fall was expected) after a 6.5 per cent surge the month prior. This brings sales of homes to the highest level (5.48 million) since 2007. Finally, the Philly Fed index shot up to 22 from 9. All good and it shows why the Fed should have tapered some time ago. That it hasn’t and that the data still comes in strong – I mean their delay can’t really be based on concerns over economic weakness, this is an unreasonable view in my opinion, because it isn’t rational given the data – should be a very bullish signal for stocks.

Certainly European bourses had a good night with the Dax up 0.7 per cent, the CaC 0.9 per cent higher and the FTSE100 up 1 per cent. Yet over in the US, the S&P500 fell 0.2 per cent, the Dow was off 40 points (15,636), although the Nasdaq rose 0.2 per cent (3789). By sector, utilities and financials were the key underperformers. Financials were possibly hit by the $900 million fine JP Morgan received for ‘deliberately misleading regulators” in the Whale case. These were followed closely by energy and basic materials and consumer goods stocks.

Outside of that, the Australian dollar is at 0.9441 or down about 50 pips from yesterday afternoon; euro is unchanged at 1.3532, while yen is at 99.44 from 98.40 yesterday afternoon. Finally, the US 10 year bond yield is at 2.74 per cent which is little changed from yesterday afternoon.

That’s pretty much it for last night’s action. On the domestic scene we saw some very concerning comments from an RBA Board member – John Edwards, who was appointed to the Board by Swan as Treasurer and who also served on Paul Keating’s staff. From the press I’ve read he seems surprised and frustrated that the Australian dollar has lifted post the Fed decision. That by itself is concerning enough – even alarming – coming from a Reserve Bank board member. I mean what did he expect? Yet my greater concern is that while it’s clear Edward’s wants a lower dollar, he is unable to specify a level. “I wouldn’t put a number on it. Lower is good.”

In my opinion, this is unacceptable. Policy targets must be clear and well publicised, this is basic economics. Citizens and business have a right to a clear and well defined path for policy. It’s in the interests of stability. Business Spectator’s own Kirstie Spicer wrote a well titled article yesterday — ‘Bernanke has the AUD on a yo-yo’. And the fact is he does. Yet another basic precept in economics is that a central bank targets a variable it can control.

I think the RBA Board needs to spend more time thinking about that, because this focus on the currency, which they have little control over, sends a conflicting message to business and the country at large. It intensifies or adds to the uncertainty — adds to volatility and frustrates decision making. In that regard, Richard Goyder, CEO of Wesfarmers has made some of the most intelligent commentary from a business leader (on policy) I’ve seen. He’s quoted in the Fairfax press as saying “If I was the RBA I’d be advocating for a good open economy that allows us to adapt and not just rely on monetary policy”.

It looks like it will be fairly quiet today in our region with no data to speak of and tonight it’s not much more exciting. Three Fed speakers is it, and while investors will be watching for guidance on the taper, I’m not sure they can really expect that.

Have a great weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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