SCOREBOARD: Fed up

Not even the Federal Reserve’s promise of ongoing easing distracted Wall Street from jobs and earnings disappointment.

Commodities and equities took some big hits last night, notionally on some disappointing data which certainly wasn’t great, but wasn’t that bad, either.

For instance, the ISM manufacturing index, which was the most important, slipped to 50.7 from 51.3. The thing is, the details of the report show that conditions probably are better than indicated by the headline result. Production actually accelerated in the month, while inventories dropped. Then we saw a growing backlog of orders and new orders rising. On the downside were employment and prices.

The ADP employment report and some disappointing earnings reports (there were some good ones though, including Facebook) didn’t help sentiment for the session either. The jobs report suggests 119,000 jobs were created in the month, which isn’t bad, but it was below expectations of 150,000. With that and the fact that stocks are at record highs, we probably just saw some heat come out of the market.

The S&P500 closed 0.9 per cent weaker (1582), the Dow was off 138 points (1700) and the Nasdaq fell 0.9 per cent (3299). Energy and basic materials were the key underperformers for the session and that was because commodities took those big hits. Crude fell 2.7 per cent ($90.9), copper was off almost 4 per cent and gold fell $15.5 to $1456.

So there were no real redeeming features for the computer algorithms last night. Not even the US Federal Reserve and its implied promise of eternal easing.

As expected, the FOMC kept rates at extreme levels in May (0-0.25 per cent) and maintained asset purchases at the current $85 billion per month. Otherwise, the Fed reiterated their ‘Clayton’s’ targets (the target you have when you don’t want to have a target) for reducing stimulus. As a reminder, they noted that they wouldn’t stop printing money until they had seen a "substantial" improvement in the labour market, although they left the definition of substantial undefined. Then they noted they would maintain their extreme rate (0-0.25 per cent) stance while forecast inflation (two years ahead) remained below 2.5 per cent (it always will) and unemployment above 6.5 per cent.

The FOMC were obviously feeling quite jovial at this meeting though, no doubt they spent most of it discussing their property portfolios, and noted that from this point, heck – anything could happen. We could increase stimulus or decrease it, they said – and actually they did say that: “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes.”

Sounds like there was some serious krumping at that mad hatters' party… "A very merry unbirthday, To me, To who? To me, Oh you!"

Note that the real message the Fed is sending to the market isn’t about minute changes to QE or not. This is irrelevant. $85 billion per month, $65 billion – it doesn’t matter. The main message is that extreme policy settings are here for the foreseeable future and their Clayton's targets tell you that will not change.

On the economy, the Fed noted that growth was increasing at a moderate pace, little changed from last month when they noted a return to moderate growth: “Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth.” On inflation, they noted it was below their long-run objective, largely due to falling energy prices.

Amazing – and the decision and statement had no impact on the market. Well, that’s not entirely true. Just prior to the public release of the Fed’s decision, bonds started selling off (must have been the Fed’s pre-release recipients responding to the comment that anything could happen). Still, moves weren’t huge and even after 10 minutes, yields were only up a few basis points at most, and they were still lower for the session. At the close the 10-year yield was down 3 bps to 1.63 per cent, the 5-year is at 0.65 per cent and the 2-year at 0.2 per cent.

In the forex space we saw the Australian dollar drop about 80 pips to 1.0278, the euro was steady at 1.3168, the British pound up smalls to 1.5560, while the yen is at 97.39.

For the day ahead, the SPI suggests our market will fall 0.5 per cent. Key Oz data includes building approvals at 1130 AEST, and they are expected to rise 3 per cent. Trade prices are also out.

Looking abroad, key events and data include the European Central Bank's rate decision. There is a lot of pressure from banks, the US, UK and everyone else for them to cut rates from the already ultra-low 0.5 per cent mark and print even more money, although nothing is expected at this meeting.

For the US, we see initial jobless claims, the trade balance, and productivity.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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