Maybe it’s all the excitement of the election, can’t say I really know for sure, but equities had a case of the bids last night – commodities more so with crude up 3.1 per cent ($88.3) and gold up about $30 to $1713. It’s not like there was even any data or news to drive things. Well there was but it wasn’t good. In Europe, for instance, German factory orders fell sharply; down by 3.3 per cent in September after a 0.8 per cent fall the month prior.
US dollar weakness is a part of the story I guess – we know the Australian dollar shot up after the RBA decision yesterday and the unit now sits at 1.0442 or some 80 pips higher than prior to the meeting. But the thing is, the euro is up 50 pips to 1.2822 and they haven’t hiked rates. So this weakness is aiding the bid for commodities, and in turn, commodity related stocks are the key outperformers – energy, basic materials (although most sectors are higher). Some reports suggest it’s a signal Romney is set for victory – so buy energy and defence, presumably because a war with someone, Iran, is more likely maybe.
Anyway, as I write, the S&P500 is almost 1 per cent higher (1430), the Dow is 158 points higher (13,271), while the Nasdaq is 0.6 per cent higher (3016). Rates then sold off and we saw the 10-year Treasury yield up about 5bps to 1.744 per cent, the 5-year was also about 5bps higher to 0.75 per cent, while the 2-year was at 0.28 per cent.
Over in Europe, and apart from those German factory orders nothing much happened. Stocks had decent gains 0.7-0.9 per cent in the Dax, CaC and FTSE, while Spanish and Italian bond yields eased further – the 10-year down 11bps to 4.83 per cent for Italy, while the Spanish equivalent was off 9-10bps to 5.64 per cent. This came after the Spanish PM said, again, that his country doesn’t need a bailout and that they would only request one if yields shot higher and the ECB let them know before hand, how much they planned to bring yields down. All fair.
So as for the RBA’s decision yesterday, its one a clearly agree with. Indeed I think they should hike 25bps or so to get rates back to a stance where it more accurately reflects the risks around growth and inflation. But I realise there is no chance of that happening. It wasn’t too long ago, before so many people became insane with fear that a 3.25 per cent cash rate would have been regarded as too low for an economy with above trend growth, low unemployment and inflation in the middle of the band (with upward momentum).
Anyway, my read of the board’s press release is that the board seems taken aback by recent developments – pickup in global activity, commodity prices are stronger inflation. They are uncertain about what is going on. So for instance they noted, in regard to the global economy that Europe was the key downside risk now and that outside of that "risks elsewhere seem more balanced”. On commodity prices they noted they were lower but "trends had been more mixed lately” and finally on the Aussie consumer, they still reckon that some of the earlier strength was temporary, boosted by government handouts (which were actually insignificant mathematically I might add), but now suggests "there have been some signs of ongoing growth”.
Things haven’t worked out as the uber doves thought quite clearly and there is some confusion perhaps surprise. This is the problem when policy makers relay on dodgy forecasts for doom and gloom that never seem to eventuate. They should have learned from that late last year when they said the domestic economy was weak. Voil, few weeks later data comes out and shows it’s strong.
So what does it mean going forward? At a straight read it seems to me that rates are on hold for a while. They noted CPI as a reason to hold and we don’t get another update till January. In the meantime, the board seems content to see how rate cuts to date impact the economy economy.
Having said that. This a board that needs very little to cut rates and they’ll make anything up they possibly can. This has been demonstrated time and again and Business lobbying for lower rates is endless. Then, the composition of the board -manufacturing lobbyist, ex ALP staffer - in conjunction with the government’s very obvious desire to use policy to buttress their election chances, means even the smallest hiccup may set off another cut. What the statement suggests to me is that higher CPI means in the absence of hiccups, we’re unlikely to get lower rates. Then again the chance of no new hiccups is not high.
Looking at the day ahead, the SPI suggests the Aussie market will underperform, the index rising by 0.2 per cent to 4484. Debt futures were then down about 4-5 ticks – 3s at 97.31 and 10s at 96.855. Then the key Australian release is the labour force numbers. Employment is forecast to be largely flat in October, while the unemployment rate is expected to lift to 5.5 per cent from 5.4 per cent. Remember these numbers are very volatile and really, anything could happen. Risks are very symmetric. Prior to that we see Japanese machine orders and trade data while tonight, the key focus will be on the ECB and BOE (no changes expected though). Otherwise German trade data is worth watching, while for the US, jobless claims are key.
Have a great day…