Friday’s session was about as unexciting as you can get, but I don’t think too many people care as it’s the season to be jolly! There are present lists, not market moves to be concerned with. With that in mind just note the major global indices were flat effectively with the major Wall Street indexes mixed around 0 /-0.1 per cent. It’s a similar story for the Australian dollar, which is up about 40 pips at 0.8964 or only a little above the Reserve Bank’s now explicit exchange rate target of 85 cents (which was first made explicit by Kim Carr in 2012, which suggests to me the target is in fact an arbitrary level picked by some lobbyist overlord). Otherwise there wasn’t much for commodities or rates.
More broadly, markets seem to be in a bit of a holding pattern if anything. Over the last week the S&P500 is off 1.7 per cent, the All Ordinaries is down about the same for the week, but of course it has been underperforming since about October – largely due to the geniuses pushing this lower dollar story. All of that is needless by the way – the float has served us well, and if the economy is actually on a downward trajectory, the currency will drop of its own accord. We don’t need policy makers or others to try and push it there – this is doing more harm than good. Consider that the terms of trade are still very high, which suggests the Aussie dollar should, in fact, be much higher.
Problems occur when policy makers try to unnaturally force the currency to move away from where it should be – and that’s what we are seeing. Confidence here is shot. The market is underperforming, business won’t invest, consumer spending has slumped. Yet on they blithely go. The absurdity is that some economists still think – after two years of ineffective action later (for the broader economy) – that lower rates would now somehow work. The fact is confidence and lending – having been smashed by Reserve Bank cuts – have only just returned to where they were before the bank started cutting and only as they stopped! House prices are pushing higher though!
We can only hope that the Fed does actually taper this week and this does indeed weaken our currency. The decision is due Thursday morning at 0500 AEST. Unfortunately, the consensus is that the Fed won’t taper this week and I’m inclined to agree. My reasons for not expecting the taper perhaps differ from most though. Whereas the Fed and others will say they are concerned about a still weak and fragile recovery, I actually think this is disingenuous and recent data shows this. Central banking, economic policy more broadly is more about spin now and I suspect that the decision to taper is a political one. That reduces the timing of a taper to a guess and it is, in truth, a guess.
This is one reason why there is such a divergence of views out there – there is significant uncertainty, especially as the Fed has already demonstrated that its economic targets are meaningless. They are not targets at all (the taper was meant to be finished by the time the unemployment rate got to 7 per cent). Well, here we are and they haven’t even started! The surprise then will be if they do taper, although I think the world – minus a hand full of investment banks – will let out a cheer if they do. I think the Fed’s statement will then focus on ‘weakness’ in the labour market, ignoring traditional mainstream metrics like jobs growth and the unemployment, to instead focus on less reliable measures like participation, population and employment to population statistics – and of course disinflation.
Against the Fed’s decision, the Reserve Bank of Australia’s minutes on Tuesday will be a non-event – not so much the government's Mid-Year Economic and Fiscal Outlook. For the RBA, the currency target keeps the easing bias alive, although that’s got to be weaker now and the governor, Glenn Stevens, at least has expressed a reluctance to cut rates further. As for the MYEFO, it’s all about deficits now – $40 billion to $50 billion seems likely and reports are the government has given up on forecasting a surplus.
There’s a smattering of data to watch out for as well – the Tankan this morning at 1050 AEDT, a ‘flash’ Chinese manufacturing survey at 1245 AEDT and for the US tonight, industrial production and existing home sales data. Big data outside of that includes the German IFO survey, Chinese property prices and US housing starts on Wednesday – and then US GDP on Friday.
Have a great week…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.