SCOREBOARD: Fed bites

Wall Street eased as Fed minutes disappointed on QE3 clues, but stimulus can still be expected by Christmas.

The Fed’s minutes out this morning didn’t offer too much that was new. I guess the important thing to take out of them is there was no clear signal that QE3 is coming which at this point is what a lot of punters are expecting. Regular readers know I think QE3 is pretty much locked in at this point – the PR campaign has already started and only the timing remains uncertain (watch the primary dealers for a better idea of exact timing). Year end is a good bet when we get all the theatrics surrounding the looming ‘fiscal cliff’. What a Merry Christmas that’s going to be. Thankfully we’ve got cricket.

The growth story we know (US data is slowing) but recall that the market is divided in two. Those such as myself who look at the recent slowing dataflow, acknowledge it, point to the fact that data does this on occasion but that it isn’t necessarily a signal to panic – and history supports this view. Over the last few years it has always bounced back. Then there are those who just panic and the Fed generally falls into this category. The minutes weren’t the most upbeat I’ve seen them, but bear in mind the remit to monetise debt. They’re not going to give a balanced view and they will take any opportunity they can to print – slowing data is a good opportunity, no matter that history has shown episodes like this are usually transitory.

As for stocks? Well the S&P finished flat (1341.45) but had been up smalls just prior to the FOMC and at the high had put on 0.3 per cent. The minutes put an end to that and the offer was on, with the index down 0.6 per cent at the low. I'm not sure what drove the bid into the close. Elsewhere the Dow was off 0.4 per cent (12604) and the Nasdaq was down 0.5 per cent (2887), while our very own SPI was effectively flat also (down a point to 4063).

Despite the weaker session for stocks, commodities pushed higher. This ride is just wild, check out crude. It was down 2.5 per cent yesterday, while WTI was back up 2.7 per cent today ($86.18). Seems the cartels just cannot make up their mind. The thing is, there was plenty of ammo to see crude off last night. Norway seems more settled and a US inventories report out last night shows stocks for both crude and distillates were up. Go figure. Copper was then up 1 per cent or so, with silver just below (0.7 per cent). Only gold was weaker, off about $4 given that the Fed isn't printing just yet.

For forex, the Australian dollar was up about 30 pips to 1.0251, while the euro is down about 30 pips (1.2236). The news out of Europe wasn’t earth shattering last night. Spain announced a bunch of austerity measures that would see €65 billion saved through to 2015 – hiking the VAT, cutting jobless benefits public sector wages etc – which was met with a 22bps drop in the 10-year bond yield to 6.55 per cent. Italy’s 10-year yield was down about 16bps to 5.8 per cent.

Finally, there was nothing much on the rates side – yields were up smalls and the 10-year T-note is at 1.52 per cent, with the 5-year at 0.64 per cent and the 2-year at 0.28 per cent. Aussie futures were off a tick or two in the end, with the 3s at 97.68 and the 10s at 97.105.

In terms of other data out last night, the US trade balance narrowed to $48.7 billion in May as exports rose 0.2 per cent and imports fell 0.7 per cent on the back of a drop in oil prices. German CPI was confirmed at 2 per cent year-on-year to June (the top end of the target).

Australian employment data is the main event today, but it is expected to be flat. I think that’s about right, although I’d note that the risks to today’s numbers are evenly balanced. Jobs growth has been pretty strong so far so there is a base effect we have to consider. Furthermore, we have to consider the carbon tax and the uncertainties it creates. The true costs are one of Australia’s great unknowns so don’t be misled by Green controlled ALP propaganda. The carbon tax will not lead to some grotesque socialist ‘utopia’ where everyone is ‘much better off’ and people are dancing in the street paying higher prices for energy in an increasingly energy intensive world.

You put a tax on energy, one of the most important inputs into economic activity, and economic activity will slow – living standards will decline. That's as simple as the fact that 2 2=4. The government will (is) trying to hide this though ‘compensation’ for some. But given the growth destroying influence of the tax, compensation can only be maintained by borrowing money from abroad. In the end this just means maintaining inappropriate fiscal policy, continuing to borrow money from overseas and wasting what should be an opportunity to accrue budget surpluses at this point. As history shows us repeatedly, this lie can only ever be maintained temporarily.

Hopefully other factors will outweigh the tax, but we just don’t know. So in the build-up to it, employers may just want sit sit back for a bit and see what happens. Offsetting that of course is the considerable pre-tax momentum that the Aussie economy had. Which of course is why the risk to the consensus forecasts are balanced. We could still get a decent number. Outside of the employment data there isn’t too much. We see German wholesale prices this afternoon and eurozone industrial production tonight. US data includes the usual weekly jobless claims figures and import prices.

Have a great day.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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