SCOREBOARD: Fed pressure

Despite one dissenter (in favour of more easing), the US Federal Open Market Committee voted to keep policy unchanged at the November meeting, although in a press conference after the meeting, chairman Ben Bernanke said that additional MBS purchases were a "viable option” and something they would consider if the conditions were appropriate. So the door to further stimulus is well and truly open.

Now, on growth and inflation, the FOMC aren't as optimistic as they were in June, revising growth down, unemployment up and inflation up as well (for this year). Note, however – and even Bernanke admitted this – that the European crisis, Japanese quake and some 'bad luck' events had weighed on growth. Indeed, in the FOMC press release, the Fed noted that "information received since the Federal Open Market Committee met in September indicates that economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year.”

Regular readers will know well that this is exactly my view and in the absence of it, we would be in a much better position. Bernanke doesn't seem to quite want to put slower growth entirely down to these events, but for mine there is nothing else to it. As I have argued before, the softness in the data stems from transitory factors. The Fed need to understand this and sit pat. Be patient, recoveries take time – and the US economy is recovering. To sit there and print money every time there is a dip in the data and impatiently demand that jobs be created faster – when 2.6 million jobs have been created in the first 18 months of the recovery so far – actually creates more alarm and uncertainty. It feeds these repeated and entirely baseless double-dip calls. Unfortunately, the Fed gives the impression they are freaking out and apparently even discussed using 'nominal GDP as an information variable' at this meeting (ie. dumping the inflation target). Bernanke did note, though, that they are not "contemplating any change to the dual mandate approach,” but the fact they discussed it is concerning. The pressure is there, obviously.

Now for the specifics – Fed members cut their growth projections for 2011 from 2.7-2.9 per cent in June to 1.6-1.7 per cent now. Unemployment was also revised higher to 9-9.1 per cent in 2011 from 8.6-8.9 per cent expected in June. For 2012, growth is now expected to be between 2.5-2.9 per cent (from 3.3-3.7 per cent expected in June) and the unemployment rate is expected at 8.5-8.7 per cent from 7.8-8.2 per cent expected five months ago. Inflation was also revised higher this year (2.7-2.9 per cent from 2.3-2.5 per cent), although forecasts for 2012 were little changed at 1.4-2 per cent.

There wasn't too much of a reaction to the Fed decision and indeed equities weakened after it. Market moves largely seem to reflect a partial reversal from yesterday's huge reaction to the Greek referendum. While we're on that, European leaders are pushing for the referendum to be held in December, rather than sometime in January as was thrown about yesterday. To help encourage them to hold it sooner rather than later, lenders are considering whether to withhold the €8 billion aid payment the Greeks were set to receive until after the vote. The Greeks need to make a €12 billion payment in mid-December.

Anyway, in Europe, equities were up 2.25 per cent on the Dax, 1.4 per cent on the Cac and 1.2 per cent on the FTSE. Across the Atlantic, Wall Street had a fairly decent session, not quite offsetting the previous falls though. At the close, the S&P was 1.6 per cent higher (1,237), with energy, financials and basic materials leading the charge, although all sectors were up. Commodities gave some support to the index – gold up $11 to $1,735, silver 4.3 per cent higher, and copper up 2.6 per cent, although crude was broadly flat – WTI up 0.2 per cent ($92.4) and Brent down 0.2 per cent ($109.3). Otherwise the Dow rose 178 points (11,836), the Nasdaq was 1.3 per cent higher (2,639) and Australia's SPI was 1 per cent higher (4,212).

In forex land, the Australian dollar hit a high of 1.0423 before settling back down to 1.0344 (little changed from 1630 AEDT). The euro reached 1.3829 before retreating to 1.3730, again, little changed from 1630 AEDT. The British pound was then off about 50 pips to 1.5932 and the yen sits at 78.08.

For US Treasuries, the 10-year yield eased a bp or so to 1.99 per cent, the 5-year about 4bps to 0.88 per cent and the 2-year was down to 0.22 per cent. Australian futures were off a tick or two to 96.32 (the 10s) and 95.68 (the 3s).

In terms of other data and news flow, the ADP employment report suggests the US created an additional 110,000 jobs in October, which was slightly above expectations. In Germany, the unemployment rate was up to 7 per cent from 6.9 per cent in October and the final estimate of the October PMI (for Europe) was little changed at 47.3. This series suggests activity is contracting but note that it is the only data print to do so and isn't robust enough as an indicator to base a recession call on. In the UK, the construction PMI rose to 53.9 from 50.1 in October. That's pretty much it.

Australian data today involves retail sales at 1130 AEDT. I have highlighted before why this isn't a reliable indicator of consumer spending and the second quarter national accounts showed again why this is so. This series has continually understated retail spending relative to other measures and so isn't really that useful in analysis. Its sole purpose is to give a guide to other less timely, but broader measures of spending. In this it has failed and it is one of the key reasons why analysts have consistently been wrong on the strength of the Australian economy and, in particular, on consumer spending. This monthly retail series shows weak spending and then people get surprised when company earnings are solid and consumer spending in the national accounts is robust. So it's not that useful as a partial indicator. That said, a weak number will of course be used, as it has in the past, as proof that spending is weak. So I'm not expecting any changes should it be soft today. Conversely, and under the circumstances, I doubt a strong number will move the market much. The median market forecast is for sales to rise by 0.4 per cent and I'm not too different to that.

Prior to that we see third quarter New Zealand employment and the market looks for a 0.6 per cent gain, with the unemployment rate forecast to fall to 6.4 per cent. Tonight, look out for the non-manufacturing ISM and factory orders. The ECB also meets though no changes expected.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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