Scoreboard: Manufactured momentum

The market seems to have taken the US shutdown in its stride, although gold and silver were belted – gold off $36 to 1291, while silver fell 2 per cent. Not what you’d expect if you’re looking for safe haven flows. As for the shutdown itself, it isn’t that unusual – during the Reagan administration there were about eight shutdowns; Carter had four or five, and Clinton two. It is the first in 17 years though (the last under Clinton) and that one went for 21 days. Normally they only last a few days though, and in that instance, the economic impact need not be great. Yet the truth is we just don’t know how long this insanity will last.

It was perhaps it's that uncertainty – and a stronger than expected gain on the US ISM index – that saw global equities push higher overnight. Gains were decent and the S&P500 rose 0.8 per cent (1695), while the Dow rose 62 points to 15,191. The Nasdaq outperformed even that rising 1.2 per cent.

By sector, healthcare, consumer services and tech stocks were the key outperformers for the session, although most sectors had decent gains. Now, the ISM had been expected to fall slightly to 55 from 55.7, instead it rose to 56.2 which is the highest level since April 2011. It’s a great result that shows not only an expansion in the manufacturing sector for September, but for the US economy as a whole.

Now that was most of the news flow for the session, though there was some other minor data out of Europe (final PMI estimates) and German labour numbers showed a modest lift in the unemployment rate for September to 6.9 per cent, although for the eurozone as a whole it was steady at 12 per cent. European stocks had a good session, outperforming the US with gains of 1.1 per cent to 1.3 per cent on the major indices. Otherwise euro was down about 20 pips or so to 1.3528, having hit a high of 1.3583.

That’s largely it for markets overnight – it’s all about the shutdown. So turning to the Reserve Bank's decision yesterday – it was a good one, and let’s hope they hold rates for good. It’s not a coincidence that, in the RBA’s words, “there has been an improvement in indicators of household and business sentiment recently”, especially in property. This is rebounding as the easing cycle has slowed.

My sense of the statement, however, is that they could easily cut again, although it wasn’t directly hinted at in the commentary. Arguing for a more neutral interpretation of the statement – and I can see why some suggest it was neutral – the central bank acknowledged there has been some support for asset values and noted “signs of increased demand for finance”. Similarly, it suggested “There is also continuing evidence of a shift in savers' behaviour in response to declining returns on low-risk assets”.

I certainly hope the Reserve Bank is feeling more neutral. It would be great for the country, and certainly none of our economic metrics suggest we need further rate cuts. However, the bank does have an exchange rate target and this complicates analysis. With that in mind there are a few things we should keep in mind.

Firstly, at this meeting the board again noted the Australian dollar was still too high. If you read its assessment of the economic backdrop, there is nothing threatening, nothing standing in the way of another cut – inflation is expected to remain low for the next two years and growth below trend. If the dollar is still too high, then why not cut? Because of the housing boom? Well, while it makes some reference to asset values and increased demand for credit, it expresses no concern, and highlights that lending is still subdued. Importantly, readers should note the way the bank doesn’t describe asset values – "rising strongly", "solid gains" or "a worrying increase". It simply notes there has been support for assets values from the easing since 2011.

With that in mind, and noting the high degree of uncertainty the bank’s exchange rate target introduces, I’m not convinced the Reserve is truly neutral as much as I hope it is. If they realise the error of targeting the exchange rate, they are neutral – not something they’ll publically announce. Otherwise, this could just be a tactical hiatus – biding their time while the taper and US debt ceiling play out. The Reserve Bank would gain little to cut now, only to have any depreciation of the dollar reversed by another decision to delay the taper.  

For the day ahead, the SPI points to a modest 0.3 per cent gain for our market today. Otherwise there is more Aussie data worth watching – building approvals especially, but we also get trade data, both at 1130 AEST. Tonight we get the European Central Bank's rate decision (no change expected) and US data includes the DP employment report and some Federal Reserve speakers: James Bullard, Eric Rosengren and Ben Bernanke.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.