I’m not so much surprised that the Fed didn’t print again, although most expect this at some point, but I am at least a little surprised that the market reaction wasn’t more marked. I guess we still have the ECB meeting tonight. The Fed at this meeting lowered their assessment of economic growth it is fair to say, noting that "economic activity decelerated somewhat over the first half of the year. Growth in employment has been slow in recent months and the unemployment rate remains elevated.” Yet there was no hint that more accommodation was coming as a result. Nothing to really validate the speculation of near-term action. As I mentioned on Monday I think the best bet at this point is year-end, when the fiscal cliff theatrics ramp up.
It’s not that market’s didn’t move at all and after the Fed’s decision, stocks fell about 7pts (on the S&P500) or 0.5 per cent straight after. At the bell though, the S&P500 was off a more modest 0.3 per cent (1375), the Dow was off about the same (12976) and the Nasdaq was 0.7 per cent weaker. In addition to the ECB’s meeting tonight, markets may have also taken some comfort or at least raised a quizzical eye brow after a stronger-than-expected jobs report. The ADP report suggests US employment increased by 163,000 in July, although it has to be said that this report doesn’t have a great correlation to payrolls. It’s large changes either way that can give a hint not changes of 10 to 100,000 of expectations. Either way it wasn’t bad news.
The same can’t be said for the ISM survey though, it improved, barely, rising 0.1pt to 49.8, but it is still below the 50 mark and unlike the Australia, European and China PMIs, this survey is actually worth taking notice of. While the never ending European crisis is clearly weighing on sentiment, I’m still looking at trend growth for the year at this stage and despite all the hysterics over US growth prospects, haven’t really seen any cause to change that forecast. But I’ll be watching the ISM closely and if it doesn’t rebound over the next month or two, that’s a signal that US growth may fall below trend (I mean for more than just one or two quarters). The difficulty in making a forecast is Europe of course. In previous years the hysteria has died down and growth has resumed, this may or may not happen and it all depends on how stupid the Europeans want to be – how long they want it to drag it on – and it is a choice.
As I have noted over some years now, the only stumbling block is confidence, but policy makers either through deliberate intent or incompetence (and I sincerely don’t know which) are the main problem in driving confidence lower. The world’s problems are psychological, literally, and this was noted by the IMF overnight. l disagree with them on one point though which is they think that it is more than just Europe. I think that’s wrong. It is only Europe. The lunacy was further highlighted by some European data released. It shows the household saving rate in the eurozone at 13 per cent. It shows the stocks of financial assets held by European households at €19trillion, that’s just financial assets. That there is a never-ending ‘crisis’ is obscene against that backdrop.
While we’re on Europe, markets there seemed to have a better session than the US, not that I think the wealth data had anything to do with it. But, FTSE up 1.4 per cent, CaC up 0.9 per cent although the Dax was off 0.3 per cent.
On the rates side, the Fed’s decision seemed to catch some punters by surprise and action was choppy around the announcement. US Treasuries had spent most of the session selling off, a bid temporarily developing just prior to the Fed’s meeting and most of the sessions losses were reversed. Come the decision, the offer was on and the US 10-year yield shot up almost 7bps hitting a high of just over 1.54 per cent. At the close, the 10-year was at 1.52 per cent or about 4bps higher than 1630. The 5-year then ended about 4bps higher while the 2-year is at 0.23 per cent. Aussie futures for their part were flat on the 3s at 97.45 and not much more than that on the 10s – 1 tick to 96.985.
Finally for the price action, Australian dollar is at 1.0461 or off about 40 pips. Euro is then at 1.2227 or about 90 pips lower. Otherwise commodities were generally weaker – gold down $11 to $1599, copper off 1.7 per cent, although crude rose almost 1 per cent to $88.9
Looking at the calendar today we see Aussie retail numbers at 1130. The market looks for a solid 0.7 per cent rise in June with the quarterly increase expected at 0.9 per cent. The trade balance comes out at the same time and a modest deficit is expected. Other than that it’s worth looking out for eurozone producer prices tonight and then of course we have the BoE and ECB decisions. As for the US, they release factory orders and then chain store sales.