Scoreboard: Fed dove cry?

Concern about Syria and jitters over Fed tapering will dominate this week, and interplay between the two could get interesting.

The latest I’ve heard on Syria, is that President Barack Obama wants to run any possible attack by Congress before going in with guns blazing (the Brits ruled out a second parliamentary vote). The thing is, Congress doesn’t reconvene until September 9, so on that basis, it doesn’t look like there will be any military action till after then. It could of course be called back sooner, but I haven’t seen anything on that as yet and with Obama taken up with Group of 20 meetings this week that seems unlikely.

Now that all took place over the weekend, so market reaction on Friday doesn’t capture that news. For Friday, most markets took a hit, and there is/was plenty to be concerned about given Syria, the Fed taper and jut the plain old fact that stocks have had a great run so far. Nothing really to push it higher I guess. Moves were decent in some cases though and in Europe the major indices were all down more than 1 per cent (Dax off 1.1 per cent, CaC down 1.3 per cent and FTSE100 off 1.1 per cent). In The US, the S&P500 fell 0.3 per cent, the Dow lost 30 points (14,810) and the Nasdaq fell 0.8 per cent. This of course all suggests that our market will open weaker today and the SPI points to something in the order of 0.4 per cent.

Syria and the Fed taper are obviously going to be in the background for the rest of this week and will no doubt dominate the market – the interplay between those two will be fascinating (A Syrian minefield of Obama's own makingSeptember 2). I mean the Fed, you’d have to think, would be highly unlikely to taper (meeting September 17-18) as the US launches a strike on Syria (just in case, right?). But it might all be over before then. Add to that the downturn in some of the recent housing indicators and an inflation rate regarded as being below target and there is plenty of ammo for doves.

Against that, actual growth looks strong and of course the US jobs numbers on Friday will be another key input. At the moment, the forecast is that payrolls will push up another 180,000, which is a fantastic result, although the unemployment rate is forecast to remain steady at 7.4 per cent. How the Fed translates all of this is anyone’s guess but we do have a few Fed speakers this week to help out... or maybe vague things up some more. I’m not going to pretend I know, but my best guess is that a September taper is going to be too early for the Fed given the mixed data – not to mention Syria.

Back home, the Reserve Bank board meets on Tuesday and there is a unanimous expectation that it'll hold rates steady at this meeting. I think the RBA also made this clear in the minutes, it doesn't necessarily think it's done cutting. So the best way to think of it is as a pause at this stage. We know this, because the Reserve Bank has given great prominence to the level of the exchange rate and quite clearly has an exchange rate target. Exactly what that target is hasn't been made public, which in my opinion is not the way monetary policy should be conducted.

Now, in the process, the Reserve Bank has held confidence down. Business confidence, as we know, is atrocious and while I don’t think we can attribute this entirely to the RBA’s conduct of monetary policy, it clearly hasn’t helped as it reinforces in people’s minds that things must be bad. The problem is things weren’t so bad when the central bank started this easing cycle, but they've certainly deteriorated since then, though this is mainly due to a sharp drop-off in consumer spending following the bank's decision, in the middle of last year, to slash rates 75 bps over two meetings. This clearly spooked people.

Otherwise, there is the crisis of leadership, which I’ve talked about before. It’s not just in politics – it’s a disease, as far as I can see, that has permeated through various layers of the community. Larger businesses especially – these guys are just not investing. The way I see things, it’s this culture of mediocrity, of welfare dependence and entitlement that is weighing. It’s the same force, funnily enough, that is guiding the Reserve Bank's exchange rate target.

What we need is a culture that encourages the entrepreneurs, the change agents or dream-weavers. Instead these people get shot down from the outset, labelled as ‘eccentric’ or weird as a means of general white-anting and maintaining the status quo. The US doesn’t do this, which is why it's such a dynamic country and why, unfortunately, many of our own entrepreneurs head over there for financing and other support. What we get stuck with is people without vision, who whine and complain and cry for the government to do something. Like everyone else, I’m hoping confidence bounces following the election – and everyone wants this government gone, it can’t govern and it's done nothing but introduce instability. But given this culture of mediocrity, I’m not sure confidence will bounce anyway.

This is why confidence is low and why ultimately growth has slowed sharply from last year despite all the policy support the Reserve Bank could throw. A weaker dollar and a couple of hundred basis points of easing and things are worse now than they were. Few people know that growth in 2012 was the fastest in five years! We just had too many people whinging that we were in a recession. With that in mind, June quarter GDP, which we get on Wednesday at 1130 AEST, is expected to show below-trend growth at about 2.5 per cent year-on-year and 0.5-0.6 per cent for the quarter. For the two days leading up to that we get some significant inputs – corporate profits, net exports and inventories – so it could change, but at the moment that looks about right.

That’s probably the key stuff – a busy week by any measure. Good luck and I hope it’s a good one. 

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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