Scoreboard: Fed limbo

Markets are still trading in the dead zone with the S&P500 (1685) and the Dow (15,520) mixed around zero, although the Nasdaq was up 0.5 per cent (3616). Same reason as last time – we’ve got the Fed and payrolls coming up, and some of the data out last night wasn’t really market moving.

I mean, US house prices surged again in May – insert visual: drunk, mangy-looking, toothless US cowboy shouting “Yeee-harrr!” and pumping off a few rounds from his six shooter – they were up 1.05 per cent after a 1.7 per cent gain the month prior, to be 12.2 per cent higher annually. But we already know that house prices are surging again, and policy makers don’t seem to really be wanting to do anything about that (“Yeee-harrr!”). They’re not very creative at the Fed: “What we need is another boom, that’ll fix things – yeee-harrr!”

Only the bond market seemed to take any notice of the data, with yields rising a little further – not too much, about 3 bps to 2.61 per cent on the 10-year, but there you go. The other thing to note is that commodities outside of gold were hit last night – crude off 1.3 per cent ($103.2), copper off 2.1 per cent, although gold was off smalls at $1325, or down about $3.

But there wasn’t much else – the euro is little changed at 1.3262, the yen is stronger again, down to 98.039 from 98.36. This keeps up and the Bank of Japan is going to have to print more money to, erm, hit its ‘inflation target’ (read: weaken the currency). Otherwise, the Australian dollar was little changed from 1640 AEST at 0.9066, although there was plenty of action after the building approvals numbers and Glenn Stevens’ speech.

It seems pretty clear the Reserve Bank is going to cut again, although I don’t think that is really a surprise to anyone and as mentioned, the timing is completely arbitrary. I do however disagree with much of what the central bank governor said, and in particular his comments on savings and confidence. Stevens noted, as I have, that confidence is essential if other areas of demand are to pick up. But I think he mistakes what is driving the unusually low confidence in Australia, which he seems to think is largely driven by global events and structural change here. This is wrong. It’s not the actual changes themselves which are weighing down confidence, but rather how policy makers are reacting to them: with sheer and undisguised panic.

This is alarming people. Stevens gives a tip of the hat to that though, maybe in stating that policy makers need "clarity of policy frameworks and objectives; consistent application of policies towards well-understood goals; and, attention to avoiding things that can dampen confidence unnecessarily". These are essential to lift confidence and I agree with that, although he seems to be directing his comments more at government. It is however interesting that he is making them at a time when the RBA has adopted an exchange rate target. Interesting because this is itself contributing substantially to the unusually low confidence that we have.

Moreover, I don’t think that the governor’s own assurance that the bank is sticking to its “inflation targeting framework which we’ve had in place for 20 years now” is all that comforting. But is that what he is alluding to? Others on the board? Few sensible people could buy this with inflation at the middle of the band, low unemployment and, up until late last year, trend growth. None of this equates to the need for record low rates, which the governor himself acknowledges when he notes that rates wouldn’t be this low, in part, if it wasn’t for the “extreme” policy settings elsewhere.

The link between those policy settings and ours is the exchange rate. Stevens notes other factors such as risk aversion as well, but this is the circularity – risk aversion is so high because the actions of policy makers are alarming people, scaring them: “Why are we cutting rates with trend growth and low unemployment? Why aren’t record low rates working?”

Enough! Wake up! The Reserve Bank board, and the government, would do well to mark the central bank governor’s words – to reflect on them. They need to keep their eyes on the main objectives and preserve sound policy frameworks.

Anyway, other data overnight showed US consumer confidence dipped a bit according to the convergence board, falling to 80.3 in July from 82.1. Then German inflation accelerated in July and sits just below the top of the target at 1.9 per cent. Still in Europe, a business climate indicator for the region suggested that things improved a bit in July, with the index rising to -0.53 from -0.67.

For today, the SPI suggests the market will be flat, and then for the data, the key stuff for Australia is the private sector credit numbers. Not much outside of that.

Looking abroad we see German labour numbers tonight, eurozone inflation (although the focus will be on US GDP figures, expected weak in Q2 at 1 per cent) and the Federal Reserve decision tomorrow morning. For mine I reckon the Fed will be dovish relative to market expectations of a near-term tapering. I can’t see them talking a tapering up after GDP printed at 1 per cent. Then again, I think they’ll want to be sufficiently vague so as to restrain risk.

Have a great day…

Adam Carr is a leading market economist.

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