Despite a positive lead from the Europeans, US stocks look set to close in the red again, although magnitudes are small. They had actually opened higher initially (S&P500 high of 0.5 per cent), following yesterday’s hit and a stronger-than-expected spike in new home sales (5.7 per cent in September after –1.3 per cent). Some positive earnings reports also helped here, as I guess did another lift in house prices ( 0.7 per cent according to the FHFA) but soon after the offer was on. And it stayed on, actually accelerating after the FOMC decision.
Now as to why that’s the case, I’m not really sure. Because they didn’t print more? Maybe but a further bout is a done deal at some point and no one was really expecting that at this meeting. In fact the FOMC statement didn’t really say much at all and I would take issue with most of it. The Fed suggests that overall economic growth ‘has continued to expand at a moderate pace in recent months’, which is fine, but then again this isn’t consistent with extreme policy measures like QE. One would think, and this was the initial justification, that there would have to be some threat of depression or deflation. Nope. The sooner Bernanke goes the better. The FOMC noted that consumer spending had picked up and they also suggested the housing sector had improved. On the downside they reckon that employment growth has been slow (it’s not, it’s the same as it was prior to the GFC, you know when the US was booming) and they suggest business investment had slowed. On inflation they note the pickup but put it down to a temporary rise in energy prices. I’d say the dip in energy prices is temporary.
So who knows but either way markets didn’t like it and pushed through zero soon after. As I write, the S&P500 is down about 0.3 per cent (1408), with the Dow off 22pts to 13079. The Nasdaq for its part is also off 0.3 per cent (2982).
As for those gains in Europe (Dax up 0.3 per cent, CaC 0.6 per cent higher and FTSE 0.1 per cent), they came despite a deterioration in the German IFO survey as well as another fall in the eurozone PMIs. Now of the two indicators the IFO is much more valuable as a lead indicator and it is disappointing to see it slip. That said, the economic indications aren’t dire. The overall climate indicator is right on average. Moreover, the current assessment index at 107 remains well above the average of 102. This is remarkable given what is going on in Europe. Expectations are the problem obviously – weaker at 93 v the average of 100 and that is understandable given the constant barrage of negative news flow. At least it didn’t deteriorate this month.
It’s possible that investors here took to the modest lift in the Chinese PMI yesterday. Possible although the index isn’t that important and I’d note that it did nothing for commodities or price action elsewhere, which all look to be weaker again. Take crude, this fell another 1 per cent or so to $US85.65 overnight as the EIA said crude stocks spiked 5.9 million barrels. Then gold was off smalls (about $US8 to $US1702) although copper posted a modest bounce.
Price action elsewhere wasn’t that exciting. The Australian dollar pushed higher initially after the CPI figures and again as the Europeans saw those figures. All up the unit is 40 pips (1.0352) from where we were at 1630 AEDT, but up almost a big figure from prior to the CPI. The euro is otherwise down smalls (1.2968) while the British pound is about 60pips higher (1.6037). Japanese yen is otherwise at 79.79. Very little action of rates then, the US 10-year is looking little changed at 1.787 per cent, the 5-year at 0.75 per cent and the 2-year at 0.28 per cent.
So then as for those stronger than expected CPI figures yesterday, they should be a wake up call to those who continue to call for lower rates. In all sincerity it’s as if these people didn’t even have a basic understating of macroeconomics. Some of the analysis I’ve seen suggesting yesterday’s CPI somehow backs lower rates is unbelievably sloppy. But it’s a reflection of the broader problem, and that is that the economic debate in Australia is terrible – bottom of the barrel stuff.
I mean whichever way you look at it, with the impact of the carbon tax, excluding the impact on the carbon tax, CPI was stronger than anticipated. It should be noted that the Statistician reckons we can’t even get an accurate estimate of how the carbon tax has hit things. So they haven’t bothered trying to differentiate the effect. Suffice to say core inflation largely strips out the impact of the carbon tax (health insurance) and this is now smack bang in the middle of the RBA’s band. As I have argued for some months, true underlying inflation was nowhere near the 1.6 per cent suggested neither by headline nor even near the 2 per cent previously suggested by the cores. 2.5 per cent is where we’re at.
What this means is that in conjunction with above trend demand and a very low unemployment rate all of Australia’s main macro indicators are telling us that the cash rate is too low, already. That we are not in need of an emergency rate setting. It’s that simple. It shouldn’t be lost on the board that all the justifications they, and others have used for lower rates turn out to be wrong. Growth is stronger and now inflation. To then shrug your shoulders, dismiss both and say "oh well” looking for the next reason to cut is gobsmacking stupidity. Low rates carry risks.
Looking at the day ahead there isn’t much for us. Tonight its worth watching out for UK GDP and then US, durable goods, jobless claims and pending home sales.
That’s about the lot, have a great day…