T’was the night before the Federal Open Market Committee and all through the house… Okay it wasn’t that bad but the fact is everyone is waiting for the Fed and so it was quiet. The stockings are hung, everyone is waiting for St. Ben and I think he will deliver. Not a taper mind you, just another $85 billion of printed money. I mean it’s just money right? And you can print that stuff forever – and as much as you want, according to economists. The only question being why no one has ever thought of it before – the genius! We could solve world poverty with these new ‘economic tools’. But then starving people aren’t banks in need I guess.
Anyway, at the time of writing, the major US indices – S&P500, Dow and Nasdaq, were about 0.1 per cent lower and had traded in a fairly narrow range. By sector only basic materials seemed to have any grunt, up about 0.6 per cent and that’s with broad-based falls across the commodity space – copper down 0.2 per cent, WTI off 0.3 per cent and gold down $14 to $1230. I suspect the lift in materials stems from a pickup in the NAHB housing market index to 58 from 54 in December (what’s good for housing construction etc.) and this follows that spike in industrial production we saw in the previous session. Otherwise most other sectors weren’t too different from zero.
Price moves in Europe were more dramatic and to the downside – the Dax fell 0.9 per cent, the CaC was off 1.2 per cent and the FTSE100 fell 0.6 per cent. What’s surprising about that is the surge in the German ZEW survey to a seven-year high and its well above average. The economic sentiment index stands at 62 now (December) up 7 points or so for the month, which compares very favourably to the average of 24. Every reason for a rally right? Instead, stocks sold off and euro spent most of the session selling off, although at the time of writing the unit had recovered enough to be largely unchanged from yesterday afternoon (1.3768).
In price action elsewhere, the AUD is about 30pips or so weaker at 0.8898, following euro down for the most of the session but without the bounce back – so we’re about 4 cents above target. Yen then is a little closer to target at 102.6. Otherwise the US 10-year bond yield is down 4bp at 2.84 per cent perhaps becoming more comfortable that St. Ben won’t taper – God bless him. And may God bless him because I don’t think too many other people are.
In terms of data flow there wasn’t much - just inflation. In the US core inflation remains unchanged at 1.7 per cent annually, while in the UK inflation is running at a 2.1 per cent annual pace which is the lowest in some years and one of the few occasions in recent history that it’s been close to target. But then the BoE no longer has an inflation target.
So for today, the SPI points to a modest lift in our stocks – up 8 points. Otherwise there is little data out and the key event will be the Governor's testimony before the House. Now there is very clearly bipartisan support for the exchange rate target despite the fact that a lower Australian dollar cannot rebalance the economy – the theory guiding the target is flawed and inconsistent. Moreover, this policy ignores the clear negative impact the pursuit of the target is having on confidence. Given this, I suspect the Australian dollar will feature heavily on the Q and A session. It’ll be more a propaganda session, rather than a genuine inquiry, to jawbone the Aussie dollar down even closer to target.
It’s almost as if the treasury, the Reserve Bank and both side of politics are not interested in an economic recovery – in a strong economy. They just want to appease their lobbyists – donations must have been huge, that’s all I can say.
My advice to Joe Hockey – if you are sincere in wanting to get the budget in order, take control of the steering wheel. Treasury and the Reserve Bank don’t have a clue, that’s clear to me. Dump the exchange rate target, then redefine the economic narrative from one of weakness – the one which we have had here since 2011, even through periods of strong and above trend growth. Change it from one of despair and constant woe – the story that is required to see the Aussie dollar fall – to one of hope and recovery. Confidence will lift and you’ll get those surpluses you want. Confidence is much more important in rebalancing the economy than a weaker Australian dollar, Joe – history proves this. This is easy to demonstrate. So take hold of that steering wheel – and get rid of those who want to hold the country back.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
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