Scoreboard: Late Fed jitters

Wall Street reversed gains in the last hour despite strong GDP figures and indications the Fed will further delay tapering.

US GDP growth ended up being stronger in the June quarter than expected, at 1.7 per cent when 1 per cent was anticipated. Now that’s better than nothing, but it’s still below trend. What’s more interesting though is that the analysis and commentary around these figures is so positive. I mean, growth is still below trend, remember, and the broad spread of the discussion is really quite positive. This is a great turnaround from the days past and very welcome because it is the right way to think.

Now, in terms of the GDP breakdown we had consumption up 1.7 per cent, investment up 9 per cent, with inventories a decent chunk of that. Of particular note, residential investment rose 13.4 per cent. All good news. Indeed imports, which aren’t a sign of economic weakness in any way, shape or form, actually took off 1.5 percentage points from growth. So momentum is actually much stronger than the headline figures suggest.

Remember as I’ve highlighted to readers in years past, it’s not the headline that matters but the breakdown. And I think this is finally what markets are focusing on. Headlines can get people into trouble, talking about double dips and the like. The fact of the matter is, imports wouldn’t be so strong if the economy was soft. Just looking at the private economy then, and excluding net exports, growth was stronger – as you’d expect at 2.5 per cent, above trend.

It’s also important to note that economic growth was revised up sharply last year to an above trend rate of 2.8 per cent from 2.2 per cent. This is more in line with the strong jobs growth we’ve seen and it’s quite apparent that this growth phase is self-sustaining and one of the best turnarounds, relative to pre-crisis growth rates, on record. Against that backdrop, the ADP employment report – which is kind of like a precursor to payrolls, which come on Friday – suggests jobs growth accelerated in July, with 200,000 jobs created.

Now, at this point global equities had punched higher, and at the peak the S&P500 was up 0.6 per cent. In the last hour of trading though, all those gains were given back. The Fed? Maybe. If anything though, I think the FOMC statement was supportive of the bid. Why? Because if anything the statement adds to the case for why QE won’t be reined in soon.

There wasn’t much flesh to the statement or anything, don’t get me wrong – nothing earth shattering. Just one word: “modest”. That’s how the Fed described economic growth since its last meeting, which is a downgrade from the view last time that growth was at a moderate pace. A small change, I know, but significant because the Fed isn’t looking for the status quo in tapering, it’s looking for growth to accelerate. And so far, in the Fed’s view, it ain’t.

Throw in comments about how inflation is “running below the Committee's longer-run objective” and that “the Committee recognises that inflation persistently below its 2 per cent objective could pose risks to economic performance “, and this is a more dovish statement for sure. A near-term tapering then looks unlikely.

So why did stocks sell off so hard in the last hour? I don’t know. There was no movement on bond yields at that time, which had rallied hard in response to the Fed, with the 10-year yield down 11 bps from the pre-FOMC peak of 2.69 per cent (only off 2 bps from yesterday at 1630 AEST), confirming in my mind this idea that the Fed’s statement was more dovish. And there really wasn’t much movement anywhere else – the US dollar weakened post-FOMC, with a bit of a bounce back from 0500 AEST (from 1630 AEST the Australian dollar is down 50 pips to 0.8985, the euro is 50 pips higher at 1.3302 and the yen is at unchanged at 97.87).

Yet at the bell the S&P500 was flat (-0.01 per cent to 1685), the Dow was off 21 points (15,499) although the Nasdaq rose 0.3 per cent (3626). Commodities had a better session of it, especially crude ($105.2) and copper, which were up 2.6 per cent and 2.21 per cent respectively, and energy stocks did indeed rise – key outperformers alongside industrials and consumer services. But telecoms were hit, as were financials and utilities. So really, I don’t know, but if stocks can’t end higher on better economic data and a lower probability of a near-term QE tapering, then I don’t know what will push them higher.

Anyway, other than that there wasn’t much. In domestic news, a Deloitte survey shows confidence of Australian chief financial officers fell sharply over the last quarter. This is national crisis in all sincerity, as I’ve noted in past years. And it’s hurting, starting to have real economic consequences.

Strangely, I see no change, no action being taken to address the great wrongs occurring. Glenn Stevens has spoken about confidence twice now in recent speeches so it’s not like policy makers aren’t aware of it. Yet I’m not sure they really understand what’s causing it – and that action should be taken. Maybe the Reserve Bank governor understands – he hinted at it when he noted that accepted policy frameworks should be adhered to.

Anyway, as I’ve noted myself in the past, and as Deloitte noted in the survey, Australian confidence is worse than in the UK and North America, whose CFO’s “are enjoying their highest levels of confidence in recent years”. This is a national embarrassment and a cause of extreme concern. We didn’t have a housing crunch or a banking crisis and yet our policy makers, like mindless automatons, feel like we should walk the same paths? Sheer stupidity. Many people are talking about the end game – our own QE – and that’s not a ridiculous thing, the way the RBA board is going. Foolish people.

For the Aussie market today, the SPI suggests our stocks will be flat. Then as for the data, we get RP Data-Rismark’s house price series at 1000 AEST, new home sales, trade prices (1130 AEST) and the Reserve Bank’s commodity price index t 1130 AEST. The Chinese manufacturing PMI also comes out at 1100 AEST. Tonight the European Central Bank and Bank of England meet, although no changes are expected, and then we get initial jobless claims out of the US and the ISM manufacturing index.

Have a great day.

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