SCOREBOARD: Dazed and confused

Markets took a dual hit as another US Fed president commented on a possible QE reduction, and the OECD cut Chinese and US growth forecasts.

He says, she says. This is a joke. Boston Fed President Eric Rosengren’s comments that it would be appropriate to consider a modest reduction in quantitative easing if the labour market continues to improve over coming months seems to have weighed heavily on markets according to some reports. I doubt it’s the key factor, but obviously it doesn’t help stimulus addicted markets.

The glaring irony of course is that the US economy is getting much stronger. In any case, Rosengren’s comments didn’t even imply he wanted much of a near-term tapering, he noted that policy, generally, was appropriate now. Overall I thought he was only continuing this deliberately vague communication the Fed has adopted recently - ‘we could do anything’ - it’s a tactic they have used before to jawbone the market.

It seems none of the news flow was really sentiment-boosting and much of it was inconsistent. For example, the Fed is talking about tapering QE, but then the OECD comes out and gets all bearish, downgrading Chinese economic growth from 8.5 per cent to 7.8 per cent and even reducing US growth fractionally - 1.9 per cent this year and 2.8 per cent next. That in turn should back the case for ongoing and never ending QE. Then some are getting spooked over the sharp rise in US bond yields lately - up 50 bps over the last few weeks, although for last night, yields fell 7 bps to 2.12 per cent. But again that just highlights why QE will never, ever end.

It’s a crazy world and getting crazier - anyway at the close the S&P500 was down 0.7 per cent (1648), the Dow lost 106 pts (15,302) and the Nasdaq is off 0.6 per cent (3467). Solid falls but not a patch on what we saw in Europe - FTSE down 2 per cent, Dax off 1.7 per cent and the CaC down 1.9 per cent. Not entirely sure why they underperformed - but there was a run of negative forecasts and data - although that’s not new as such. In any case monetary growth remains sluggish in the Europe (3 per cent), German unemployment rose 21,000, although the unemployment rate remains very low at 6.9 per cent in May. Also important to note that inflation shot up to 1.7 per cent year-on-year from 1.1 per cent as the temporary influence of softer energy prices wanes.

In price action elsewhere we saw mixed action in the commodities space with precious metals up - gold $13.7 to $1392 and silver up 1 per cent, although copper fell 0.5 per cent and crude was off 2.2 per cent to $92.89 (weaker growth in China and the Saudis expressed contentment with current prices). Then in the currency space, US dollar weakened with the Australian dollar up about 80 pips or so to 0.9637 at which level it’s still about 5-10 per cent undervalued. The euro then rose to 1.2938 (roughly 90 pips or so higher), while the yen is at 101.14 from 102.37.

Looking at the day ahead the SPI suggests we can look forward to a 0.4 per cent fall for Aussie stocks, then in terms of the data, the key numbers are the Aussie capex figures at 1130 AEST. The consensus is for a modest lift in capex of about 0.5 per cent following a 1.2 per cent fall in the fourth quarter. Now capex itself actually remains very strong, but it’s lumpy, it bounces around and this confuses a lot of people into thinking the sky is falling when we get a soft number. Yesterday’s construction work figures were a case in point. Softer than expected, but the trend is unchanged.  The market is certainly very bearish on Australia these days and the OECD is only the latest to issue a downgrade on the Aussie economy. It now expects growth of 2.6 per cent this year, which is roughly the same as Treasury’s forecast – a year a go they thought it would be 3.7 per cent – and naturally it’s the end the mining boom that’s to blame.  

This campaign by industry groups, the government, unions and others to get the dollar down, via rate cuts, has done terrible damage to the economy. I don’t know any other country where stakeholders have done so much damage to their own interests out of sheer stupidity. The PR, first put in place in 2011, has smashed confidence, weighed heavily on the property sector and it has seen our equity market underperform as other markets push new records.  The costs of the campaign have far outweighed any benefit - of which there haven’t really been any.  I mean people talk about the damage the high Australian dollar wreaked on the economy, although really there was never any evidence of that: the economy performed quite well with a strong exchange rate. Conversely it is quite evident the impact low confidence is having. The protagonists seem to be engineering the very outcome they said they were trying to avoid. It’s absurd. As I mentioned the other day, the unfortunate truth is that our currency, equity market and the economy more broadly are highly correlated. They tend to rise and fall together and I genuinely think that those wanting lower rates (when we don’t actually need lower rates) and a lower dollar simply don’t know this. Fools rush in as the saying goes.

Building approvals are also out at the same time and the market looks for a again of 4 per cent in April after a 5.5 per cent fall last month. Globally, the key data includes the European business climate indicator and another US GDP estimate - for the March quarter (2.5 per cent expected).  Pending home sales and jobless claims are also due.

Have a great day…

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