SCOREBOARD: Fed suspense

It looks be a subdued start locally after Friday's surge, while global markets anxiously await this week's Federal Reserve meeting.

Friday’s session was mixed and there was probably not too much in the way of signals for the week ahead. Well, other than the fact that the SPI was off about half a per cent, so maybe our market won’t have a great session today, following the surge on Friday. US markets seem to have been spooked a bit by disappointing data and it was all on the softer side on Friday, with few redeeming features.

So US industrial production was flat in May, although manufacturing production rose slightly (0.1 per cent). Then consumer confidence fell in June according to the University of Michigan. We’re not talking a big fall, just to 82.7 from 84.5, but still it was a fall.

So following modest gains in Europe (0.1-0.4 per cent), US stocks were down 0.6 per cent on the S&P500 (1626) and Nasdaq (3423) and 0.7 per cent on the Dow (15,070). Here’s the weird part though – commodities actually had a solid session, with crude up 1.2 per cent ($97.85), copper up 0.5 per cent and even gold about $10 higher ($1387). And that was without any major currency support.

Truth is, the market seems to be torn between the very clear signals that the global economy is accelerating, especially the US economy (notwithstanding Friday’s data), and this pavlovian repose markets appear to have developed to all things related to QE.

So there is a sense of anxiety over the FOMC meeting this week (Thursday 0400 AEST).  At the outset it’s difficult to know what the Fed will actually do, meeting to meeting. That they should withdraw QE and raise rates is, to my mind, beyond question – and they will, one day. But the Fed are reluctant to do it, this we know, and the sign posts the Fed has outlined to withdraw stimulus have been made deliberately vague.

So the problem is, the market doesn’t have clear targets as to when or why the Fed would start to ease back on printing. We only have their commentary, which has been less than clear. So could some clarity arise at this meeting? Well, it could and should – but the rhetoric from Fed officials doesn’t suggest that.

Firstly, and while jobs growth has been strong and the private economy is pumping, some have argued that inflation is at risk of falling too far below target. Ample scope then to keep QE as is. I suspect that will indeed be the case at this meeting but that is based on nothing really except the commentary from some that inflation is too low. I think the bottom line is that even if the Fed acted this meeting we are only talking very small adjustments, I doubt they’ll do anything significant, and the fact is that while markets may swing around on this, the real economy implications are nil.

Still on the central bank front, Australia has its own policy excitement this week. Okay, that’s an embellishment – the Reserve Bank’s minutes (Tuesday 1130 AEST) won’t be that exciting at all. However they may attract more than the usual attention given the unusually bland press release that accompanied their decision to hold in June.

The question is what information content the minutes will have. Probably not much to be honest. It’s become a bit of a cliché and, well, it’s very clear that it doesn’t feel like it at the moment, but we are in fact looking at a goldilocks economy – not too hot, not too cold. Trendish growth, a very low unemployment rate and inflation that’s mid-target. That it doesn’t feel like it comes down to the national economic discussion, the national pysche.

The press and many economists have never embraced Australia’s good economic fortune. Trapped in a GFC time warp, by the looks of it – and as I’ve argued before, the easing cycle has only supported and justified the hysteria. We’ve never really been able to enjoy our economic outperformance.

Anyway, the Reserve Bank has had a hard time actually pointing to anything to justify easing, and it’s become increasingly clear that it all boils down to the Australian dollar now. Other rhetoric suggests that because the mining boom has ended the bank needs to cut more to boost the non-mining sector.

Two issues there though. There is little evidence that the boom is over. It’s certainly slowed, but that’s very different. Secondly, the Reserve Bank has already cut substantially, and lending rates are at record lows. That this hasn’t boosted the non-mining economy already points to a broader malaise and so if that isn’t sufficient, more cuts won’t be either – the circularity or inconsistency that I’ve mentioned before.

The country does have a problem, many problems – that’s abundantly clear –but it’s not the price of money or the level of the dollar. In that regard we have the same problem here that we have with the Fed – we don’t know what the target is now. Monetary policy is becoming ever more opaque, just like the rest of the financial market.

Other than that there isn’t a great deal for Oz apart from car sales today at 1130 AEST. There is of course the usual run of US data – housing starts, consumer prices and existing home sales to name just a few. But I’ll talk more about those on the day.

Have a great week…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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