Two Fed speakers came out overnight and pretty much hosed down any chance that QE would be withdrawn or tapered in the near term. Both St Louis Fed President James Bullard and New York Fed President William Dudley are voters, Dudley part of Ben Bernanke’s inner circle. The general tone presented was very similar to another very dovish FOMC member, Chicago Fed head Charles Evans.
Dudley said that the next move in policy could go the other way, but for QE to be tapered, he wanted to make sure recent gains would be sustained. He noted that "at some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook…At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases."
I think that translates as no chance of a reduction in QE this year. Why? Because we have already seen a substantial improvement in the labour market and private demand is strong. It’s unclear what else they are waiting for. And the difficulty for policy makers is that this has been deliberately left undefined. The Fed merely note that they want to see a "substantial" improvement. Again, something that argues against a near-term tapering. If the Fed were genuine they would define what substantial is, they would attach metrics to it. That they don’t do this is telling. Bernanke’s testimony is tonight but I don’t think it will deviate from what has already been outlined by Dudley et al.
With that in mind, the commodity price action continues its space oddity. Gold allegedly fell on talk that QE was to be tapered. Instead we find that the Bank of Japan has increased QE and the Fed notes that not only will they not be tapering QE but they will expand it – and gold falls. Last night the decline was almost $10 ($1397). It’s a similar story with other commodities, with crude down 0.9 per cent for the session ($95.9) and copper falling 0.6 per cent. It seems clear to me that there has been a fairly drastic departure of most commodity prices from the underlying fundamentals – very strange indeed in this world of free money.
The script was otherwise what you’d expect. Bonds rallied and hard in some cases. So for instance the US 10-year yield had hit a high of 1.99 per cent and following the Fed rhetoric rallied hard, such that the yield dropped 6 basis points to close at 1.93 per cent. The 5-year is then at 0.82 per cent and the 2-year at 0.24 per cent.
Similarly, we saw the US dollar weaken against the major currencies, if just modestly. The euro pushed 55 pips higher from its session low to sit at 1.2908, while the Australian dollar is at 0.9808, also up about 50 pips from its session low but down smalls from yesterday afternoon. The British pound is then at 1.5154, down almost a big figure after softer than expected inflation results.
UK inflation is still persistently above the target at 2.4 per cent (down from 2.8 per cent), although the retail price index which is used for indexing purposes is still much higher at 2.9 per cent year-on-year from 3.1 per cent. Recall that the recovery transcript called for low inflation outcomes in the post-crisis recovery – deflation, even. It’s quite clear however from recent global inflation results that we are nowhere near this. Instead, inflation accelerated post-GFC and it remains persistently elevated. Moreover recent lower outcomes are only due to the temporary effects of falling energy prices.
Anyway, that aside, global stocks posted further modest gains overnight with gains of 0.2-0.3 per cent for the Dax and CaC and the FTSE100 rising 0.7 per cent. On Wall Street the major indices closed 0.2-0.3 per cent higher with the S&P500 at 1669, the Dow at 15,387 and the Nasdaq at 3502. Nothing much to it really, and in spite of modest gains globally, the SPI points to a fall of 0.2 per cent for our market today.
As for major action there isn’t much – we see consumer confidence at 1030 AEST, and it’s hard to call what will happen for the May result. Confidence fell 5 per cent in April on growing talk of the need to cut rates further here. That the Reserve Bank delivered, and given all the talk of the end of the mining boom etc., it’s possible that confidence will fall again.
Offsetting that though (hopefully) is the fact that jobs surged and the unemployment rate fell, just days after the Reserve Bank cut. Policy makers and many business leaders might be living in an alternate reality, but the real economy continues to defy the unrelenting pessimism – again for the fifth year in a row, which I find unbelievable and a sad testament to the very poor quality of economic discussion and analysis in this country.
You can see that in the Reserve Bank's minutes yesterday. Reading through, it’s quite clear that the board had a hard time justifying why exactly it was they cut rates – they noted nothing had really changed from last time. As expected, they played down the role the Australian dollar took, but when you read the document it's clear the dollar was the sole target.
Typically, it makes for bad policy to try and target something you have little to no control over, but this seems to have been lost in the quest of some businesses and policy makers to drive the dollar down. Despite the fact that a strong currency is actually beneficial to the majority of Australians.
Globally we get Bernanke’s testimony to Congress but, as discussed, don't think he’ll offer anything new. In addition to that we see the FOMC minutes and existing home sales. Then we see UK retail sales and the eurozone current account.
Have a great day…
Adam Carr is a leading market economist.
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