SCOREBOARD: Fed comfort food

Wall Street continued its upward trend and US bond yields fell following reassuring Fed talk and solid jobs data.

Day three and US stocks pushed higher again. Basically the themes here are good economic data (notwithstanding recent GDP downgrades) and, as I flagged would be the case at the beginning of the week, hard work by Fed speakers to play down QE tapering or QE exit talk.

It’s clear the Fed thinks the market has overreacted and is at pains to calm ‘the feral hogs’ down. Truth is, the Fed is going to be trapped into QE forever – ultimately, the Fed is the market’s hound, it just doesn't realise it.

Anyway, William Dudley, president of the New York Fed, went as far as to say that market moves were “quite out of sync” with Fed expectations, and he noted that if the economy turned out weaker than the Fed thought, QE could be ramped up. This is something I highlighted after the FOMC meeting – it wasn’t irrelevant for the market that the Fed mentioned, in a quite even handed manner, that they would or could ramp up QE, and the fact that their growth forecasts are quite strong suggests that is more likely to be the case (as there is ample scope for the Fed to be 'disappointed’ with growth). We also shouldn’t forget and this is something else emphasised by Dudley: that even if QE is tapered, this doesn’t represent a tightening in policy.

Now, when you throw in other comments from Fed speakers – Fed governor Jerome Powell said that the spike in bond yields was more than any reasonable assessment could justify – we saw some solid moves. The US 10-year Treasury yield itself fell about 6 bps to 2.48 per cent, while the 5-year was down 7 bps to 1.38 per cent, though part of that was due to a decent Treasury auction – 7 years, with strong demand.

As for stocks – good bids all round with the major US indices up between 0.6-0.8 per cent (S&P500 1613, Dow 15,024, Nasdaq 3401). The bid was led by financials, industrials and consumer stocks, each of those posting a gain of 1 per cent or more. Conversely, basic materials and energy underperformed, although actual moves in the commodity space weren’t too bad outside of the precious metals, which continued to be trashed – gold down $30 to $1199, which is the cheapest it’s been since mid-2010. But copper didn’t fare too badly last night, up 0.4 per cent, and crude shot up 1.4 per cent to $96.8.

I guess helping those moves was some reasonable data, especially on the jobs front. Initial jobless claims fell 9000 to 346,000, again indicating further decent gains on the jobs front, while personal income rose 0.5 per cent in May and spending rose 0.3 per cent. Good solid growth boosting gains.

There were a few bits and pieces otherwise, nothing major – European stocks all rose (0.6-1.3 per cent) and data there was okay. The eurozone business climate indicator rose to -0.68 from -0.75, economic confidence rose to 91.3 from 89.5, while the German unemployment rate was steady at 6.8 per cent. Also worth noting is that the UK didn’t have a double dip recession in 2012 after all. That little baby was revised away – poof! Jus’ like that!

Otherwise, the Australian dollar is at 0.9277, down around 35ish pips from yesterday afternoon. The euro is little changed at 1.3037 and the yen is at 98.4 from 98.

Our market today is expected to rise 0.5 per cent according to the SPI. Then the key domestic data is private sector credit at 1130 AEST. In terms of the global flow there is a run of Japanese data this morning – industrial production, inflation and retail spending. For China we see a business sentiment indicator, while tonight we see German inflation, US consumer confidence (Michigan Uni’s measure) and more Fed speakers.

Have a great weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.