SCOREBOARD: Force Fed

The distorting influence of the US Federal Reserve’s economic policies were to be seen everywhere last night. On a night where the ISM survey fell below the 50 barrier, it was risk on! Eventually – and in the US at least. To be fair, we have seen the ISM survey (which is one of the few good ones) flirt with the 50 line a few times before  – in 2011 and 2012. One month doesn’t really signal anything and you need to see a sustained movement below 50 (below 42 if you’re talking about the whole economy) to be concerned. We’re nowhere near that at the moment. But production did fall sharply in June according to the survey, as did new orders. As in past years I would not worry about this, noise at the moment and the usual tidal flows that you would see in any robust economic expansion.

However you wouldn’t normally expect to see commodities surge and equities push higher on the figure – and we’re talking decent gains. Crude was up 1.4 per cent ($93.26), copper was 1.3 per cent higher and even gold was up $18 to $1411. The US dollar looms large here –  as does the hand of the all-encompassing US Federal Reserve.

Now I should mentioned that we did initially see the reaction on equities that you’d expect from a softer ISM survey - at the low the S&P500 was down 0.5 per cent. Que the Fed. This time round it was commentary from two Fed Presidents, both non-voters – Atlanta Fed President Lockhart and San Fran Fed President Williams.  Now, consistent with rhetoric we’ve heard from other FOMC members, both suggested that QE could tapered over the next few months. So far nothing really of interest and not all that market friendly in any case. What the market found more interesting were subsequent comments.

Lockhart for instance said that so far he wasn’t “getting a clear picture of an economy that really is tracking with considerable momentum.” Now I think that’s wrong, and the data back’s my view notwithstanding month-to-month volatility. The trend shows the private economy is growing at very strong rates. However those comments are consistent with a Fed that is prepared, once again, to overlook this positive data and continue printing. As they have done in past years.

The bigger truth was stated by Williams and it’s a point I’ve noted before: “The bigger picture is that any adjustment is not a major policy shift.” That’s assuming one is made. And in any case, Williams added another truth “Even if we do adjust downward our purchases, it doesn’t mean we’re now in some autopilot of moving in the same direction… you could even imagine a scenario where we adjust it downward based on good data and then adjust it back”.

As the market digested the ISM and then the above Fed commentary, the bid was on and stocks rebounded from their lows. At the close the S&P500 put on 1.1 per cent (from the low) to be 0.6 per cent higher for the session (1640). The Dow was 138 points higher (15254) while the Nasdaq was up 0.3 per cent (3465).

The US dollar was then weaker, helping the bid for both stocks and commodities and we saw Australian dollar spike up 130 pips to 0.9766 which highlights that the key influence over the Australian dollar’s trajectory is Fed policy, not what the Reserve Bank does. If it becomes clear that the Fed won’t taper QE much, then the Aussie dollar will be back over parity, regardless of how much the Reserve cuts. Elsewhere in the currency market, the euro was then up about 60 pips to 1.3076 while the yen slipped to 99.48 from 100.37. Finally for the price action, the US 10-year yield was off 1-2bp to 2.12 per cent.

For today the SPI suggests our stocks will be flat today. Outside of that of course we’ve got the Reserve Bank’s decision at 1430 AEST. No one is looking for a hike at this meeting although the best bet is another cut at some point. Policy to my mind lacks transparency at the moment with the Australian dollar as the target. We can’t be sure of where trough will be, nor can we be confident as to the timing of any cut. In that environment, economic data has only limited influence on rate deliberations - as we saw after May’s cut which was followed up by another strong jobs report.  It’s a political decision ultimately and so protagonists will only see what they want to see. And if they don’t see it they they’ll simply forecast it - actual economic settings are a side issue. The tragedy for the nation is that the effort to keep the dollar is supposedly directed at boosting the economy Instead what we find is that it is actually growth destroying - confidence is shot from the effort.  It is weighing on our property sector (as we saw with yesterday’s house price data), our equity market and non-mining investment. All of these are the casualties of targeting a lower Australian dollar.

It’s the consequence of having people at the helm who simply don’t seem to understand or know what to do. The absurdity is that in response to weakness in our stock market, property sector and the like, all they can come up with is even lower rates! And these people are oblivious to the fact that if it is true that we need even lower rates, then clearly lower rates aren’t working! The added problem of course is that we can’t even say our manufactures will get a boost from a weaker dollar as that sector was in decline even when the dollar was below parity – and at 70 cents.  

Prior to that at 1130 we get two useful inputs into tomorrow’s GDP figure. At the moment I suspect GDP will be weaker than the 0.8 per cent consensus forecast. We’re looking at weak inventories and business investment fell so it’ll be harder to get a solid GDP outcome on that basis. The public accounts and net exports could provide the offsetting lift and I’ll finalise my forecast later today, but any weakness here could conversely see a much softer GDP outcome.

Aussie data aside there isn’t much. US trade figures tonight, European producer prices - that’s about it. Have a great day…