Scoreboard: Continental drift

Europe was hit by a storm of disappointing earnings and Greek bailout talk, while the Reserve Bank's minutes caused a stir closer to home.

US stocks ended mixed overnight with the S&P500 up 0.4 per cent (1652), the Dow off almost 8 points (15,002) and the Nasdaq up 0.7 per cent (3613). No data really, and piece action seems to have been supported by a modest fall in bond yields for the session, or rather the absence of any rise - the US 10-year yield down 1 bps to 2.82 per cent - some positive earnings reports from retailers like Best Buy and Urban Outfitters, and probably underpinning all that, the view that the current sell-off could only go so far without any actual negative news.

That wasn’t the case in Europe though, where stocks were offered and moves were big – The Dax down 0.8 per cent, the CaC off 1.4 per cent and the FTSE100 0.2 per cent lower. Not too much that I could see for the action. Miners obviously took a hit, BHP Billiton and Glencore Xtrata both down on disappointing profits and in the case of Xstrata asset writedown. Then Germany’s foreign Minister said that Greece would need another bailout. Otherwise the downside moves are being blamed on tapering fears in the press.

Price action elsewhere saw commodities weaker – crude was down 2 per cent ($104.96), copper fell 0.1 per cent, and gold rose $5 ($1370). In forex, the Aussie was up 30 pips to 0.9067, the euro was 80 pips higher to 1.3419 and the yen was little changed at 97.28.

Bits and pieces otherwise. Still plenty of press about an emerging market crisis, in the emerging markets – India’s rupee being smashed, Indonesian stock markets belted and lots of comparisons to 1997. Something to watch, and no doubt there will be a lot more commentary out on it.

As for the Reserve Bank’s minutes yesterday, they seem to have caused a bit of a stir and certainly the Australian dollar dropped over a big figure on the statement. I’m surprised by that to be honest, because from my read of things, the minutes didn’t really offer any new guidance over the statement. However that wasn’t the consensus and economist rushed to change rate forecasts to no change. As I noted at the time, I think people probably misread the Reserve's statement. I wasn’t convinced that the bank was trying to signal rates on hold and the minutes bear that out.

What the minutes also make abundantly clear for those left doubting, is that the Reserve Bank has an exchange rate target. I think this is what wrong footed those economists who changed their forecasts – plenty of economists won’t accept this. Noting that, in the normal run of things when you see rates slashed to record lows, global growth picking up, the exchange rate depreciating sharply, the normal thing to do would be to revise up your growth and inflation forecasts – no need for further rate cuts the right? This is logical and I understand why people read the statement the way they did. Everyone is expecting the trough as the Reserve has clearly gone too far; enough is enough and the statement should have been neutral.

However, we can’t think like that now because exchange rate policy is guiding monetary policy and people should be in no doubt about that. Specifically, the bank’s minutes noted that “the course of the exchange rate would be important. It had declined since the previous meeting, though remained high by historical standards.” This excessive focus on the exchange rate is simply another manifestation of what Gary Banks was talking about in his 2013 Stan Kelly Lecture – the return of the rent seeking society. Policy is being unduly influenced by rent seekers and Reserve watchers must have this front and centre if they wish to determine the path of policy.

Otherwise the data today is light for Australia, nothing worth noting and the PIS suggests Aussie stocks will be flat to positive (up 0.1 per cent). Tonight is reasonably quiet as well, with US existing home sales and the FOMC minutes the key release. As I mentioned on Monday, I’m not looking for too much clarity from these minutes as to the timing of a taper. I think the Fed wants to keep things reasonably vague – so it is a guessing game. The balance of commentary from Fed voters at this stage rules out a September taper, but this is a popular date, with many saying that meeting is a done deal. Whether that’s inside info or posturing from commentators I don’t know.  Markets are treating the taper as if it’s on now anyway so the exact timing probably doesn’t matter that much, more so the ongoing rhetoric – expected pace etc – and I doubt we’ll get that information

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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