Scoreboard: Fed happy talk

Wall Street posted record highs and commodities got a boost on the back of the Fed's reassurances.

We saw another record high for the S&P500 last night – and the Dow, I should note – both pushing up more than 1 per cent (S&P500 1.4 per cent to 1676 and the Dow 175 points to 15,467) and led higher by tech, basic materials and consumer goods, although all sectors had a solid run.

Apparently it’s because of the Fed’s minutes yesterday – well, maybe not so much the minutes as comments chairman Ben Bernanke made three hours later that highly accommodative monetary policy was needed for the “foreseeable future”.

What? I mean, he’s said that before, it’s not new, but those comments also apparently drove solid gains across Asia yesterday. Sad times. Bernanke’s comments weren’t necessarily promising QE. He was more just reiterating that even if they taper, policy will still be extremely accommodative.

New, old, whatever – the prospect of free money had a noticeable effect on commodities too for the session. Gold shot up $37 to $1284, silver was nearly 5 per cent higher and copper rose 2.8 per cent. Crude in contrast fell about 1.8 per cent following some strong gains of late to $104.6.

There wasn’t really too much else to the session. Data-wise we saw jobless claims out of the US and they rose modestly to 360,000 in the week to July 6 from 344,000. Also of note, the US posted its biggest June budget surplus on record $116 billion, partly due to large dividend payments from Freddie Mac and Fannie Mae. So far for the fiscal year, the budget deficit is $509 billion, with stronger tax revenue driving the improvement – up 145 per cent.

The price action otherwise wasn’t that exciting. For the forex front, the Aussie dollar is off nearly a cent to 0.9191. The euro was otherwise unchanged or little changed at 1.3096 and the yen was little changed at 98.96. On the rates side, the US 10-year yield was up about 1bps to 2.576 per cent on a 6 bps range – nothing much.

Yesterday’s jobs numbers were a mixed bag really, with something for everyone. For economists who’ve been talking about recession every day for the last five years, there would have been an almighty cheer as the unemployment rate shot up to 5.7 per cent. Air punch – “Yes! Awesome!” they would have said as they rubbed themselves down with butter. Breaking out into a cold sweat chanting, “Who da king? You da king. Booyah! Who da king? You da king. Booyah!”

Normal people, in contrast, would have taken heart that jobs growth was stronger than expected – another 10,000 jobs added for the month.

One problem is the standard errors associated with the numbers, already quite large, are even larger this time round as the Australian Bureau of Statistics phases in a new survey design. There were some very large moves around, which look odd. Indeed, the lift in the unemployment rate was quite large, notwithstanding the rise in jobs of late. So far we’ve see 100,000 created, which would ordinarily be more than sufficient to see unemployment fall, although it’s fair to say that within that there is evidence of some caution.

Full-time jobs, for instance, are only up 20,000 – and I put that caution down to the destructive and confidence-destroying campaign to slash rates and lower the Australian dollar. Anyway that doesn’t change the fact that the unemployment rate is rising, not because of some downturn-heralding job shedding, but because more people are apparently entering the labour force. That’s not necessarily a bad sign. Indeed, if we had the kind of participation that we had pre-GFC, the unemployment rate would be 5.2 per cent. Hours worked also surged in the month, so all in all I don’t think the result is bad, it certainly isn’t indicative of a slowdown given the absence of job shedding.

Having said that, and watching the news last night, I get the feeling that some television stations were only a step away from running a 24 hour special on Australia’s jobs crisis – with appropriate dramatic and scary music. I can only assume the producers haven’t tried to get tradesman to do anything recently. But I have – quite a few, actually – and I can tell you right now there is nothing wrong with this jobs market. The market had the right reaction though I think, ignoring the figures with the Aussie dollar and the All Ords both punching higher.

As for policy, a rate cut is always on the table at every Reserve Bank meeting given the board are targeting the currency and think it is too high. The fact is the board started cutting when the unemployment rate was at 5.2 per cent and kept cutting as the unemployment rate fell and economic growth accelerated. I don’t think we should therefore pretend that yesterday’s jobs figures were in any way pivotal. Consequently, I suspect even a moderately soft/high CPI will see them cut.

To the day ahead, the SPI suggests our market will be up 0.7 per cent today, while the main domestic data is the monthly home loan figures. Tonight we see eurozone industrial production, US producer prices and the preliminary July estimate of consumer confidence from Michigan University.

Have a great weekend…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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