It was a big night for the Fed last night, who held the stage and dazzled audiences around the globe. Chairman Ben Bernanke put in a sterling performance, softening the QE taper blow as expected by noting that a taper was not set in stone or on a pre-determined course. Now, I don’t think that’s really anything new, but markets had panicked a bit and like a good hound, one pull on the leash from Wall Street and the Fed quickly changed its tune.
In terms of actual policy intent, we really didn’t learn anything new though. The Fed Chair reiterated that if the economy strengthened then QE could be tapered – as he has said in the past. But as I’ve highlighted elsewhere when you read the fine print, the bar is actually quite high for a taper and the truth is, it doesn’t really change anything even if they do it. They will still be printing money and policy will be remain uber-accommodative. The best way to think about it is that the Fed is talking of a taper – might do it, but they’d want to see the economy accelerate to a fairly strong pace, and of course don’t want to see yields spike.
The Fed’s Beige Book was also out this morning and it was quite upbeat. Survey respondents noted that “overall economic activity continued to increase at a modest to moderate pace… Manufacturing expanded in most districts since the previous report, with many districts reporting increases in new orders, shipments, or production. Most districts noted that overall consumer spending and auto sales increased during the reporting period.”
It goes on to note construction and residential real estate activity picked up etc., and was a pretty upbeat survey overall. Not too shabby.
With nothing much else out, stocks on Wall Street pushed modestly higher, with the S&P500 closing up 0.3 per cent to 1680, the Dow 18 points higher (15,470) and the Nasdaq rising 0.3 per cent (3610). Energy, basic materials and financials were the key outperformers for the session (strong earnings from Bank of America), although commodities themselves were actually weaker, bar crude, which rose 0.5 per cent ($106.5). Copper though was off 1.7 per cent and gold fell about $16 to $1274.
You could have expected commodities to push higher for the session after some very rare optimism from the International Monetary Fund. Amidst all the doom and gloom on China, track three of the never-ending, depressing CD, they reckon that not only can China meet its growth target of 7.5 per cent but probably exceed it as well! Just a bit forecasting growth at 7.75 per cent. But it makes for a welcome change.
For the price action otherwise, the Australian dollar is up 20 pips to 0.9244 having hit a high of 0.9289. The euro is then is off smalls to 1.3125, while the yen sits at 99.57. As for Treasury yields, they were off a bit after Bernanke’s testimony – only 4 bps or so though on the 10-year (2.49 per cent).
Bits and pieces otherwise. For US data, housing starts fell 9.9 per cent in June, although that comes after a 9 per cent increase the month prior so that data didn’t ruffle any feathers. In Europe, construction output fell 0.3 per cent after a 1 per cent gain the month prior, while in Britain the unemployment rate remained steady at 7.8 per cent.
Looking at the day ahead, it’s going to be a quiet one. There is little data flow regionally, National Australia Bank’s June quarter confidence measures and Chinese property prices are it. Tonight, the key data include initial jobless claims, the Philly Fed index and Bernanke’s testimony to the Senate.
Have a great day…
Adam Carr is a leading market economist.
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