Scoreboard: QE consumption

A surge in consumer credit fuelled another outbreak of QE taper fear, while comments from the Bank of England's governor lashed British markets.

US stocks were hit again last night for the third straight session, although losses weren’t anything like what we saw on our market or in Japan. But then again Australia is gripped by depression and Japan is a basket case economy. Anyway, at the bell the S&P500 closed down 0.4 per cent (1690), the Dow lost 48 points (15,470) and the Nasdaq was off 0.3 per cent.

All sectors were in the red, although consumer stocks and financials were the hardest hit. This, I have to confess, surprises me given consumer borrowing in the US continues to surge. Consumer credit stats last night show a $13.8 billion increase in the month of June, after a $17.5 billion rise the month prior. Good for banks and consumer stocks, right?

But it’s the taper, as usual, being cited for last night’s downs. I would have thought people would be bored by taper talk by now, but hey, you never know! There was some fantastic mileage out of Greek concerns and recent rhetoric suggests there may be another attempt to resurrect that crisis too after September and German elections. Tag team!

Anyway, another Fed President was out and about last night saying anything could happen. More specifically, the Cleveland Fed President, Sandra Pianalto, said “In my view, there has been meaningful improvement in both current labour market conditions and in the outlook for the labour market …In light of this progress, and if the labour market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.”

Two things to note. She didn’t use the word ‘substantial’ – which is what the Fed has said it wants to see before tapering – just a ‘meaningful’ improvement. Moreover, she didn’t nominate a time frame. So in reality she said nothing.

Anyway, there was more excitement provided by another central banker: the Bank of England’s Canadian man. The occasion was the Bank of England’s inflation report, although to be honest I don’t know why they bother. They haven’t hit their inflation target for what, five years or something? And market economists just sit there with their fingers in their ears singing, “La, la, la, la, la – I can’t hear you! My nanny says deflation is a big, huge problem here.”

Taking his cues from the Fed, Governor Mark Carney nominated economic “targets” that must be reached before rates go higher. His view is that the unemployment rate must be 7 per cent or below – which is currently not expected until 2016. Also, he said that the bank would rethink this guidance if inflation were set to be 2.5 per cent or higher over the medium term – apparently not even aware that inflation has already been above target for many, many, years, which of course makes a mockery of these economic targets and the bank’s medium-term inflation forecasts. However, he also threw in a line about financial stability, too. So if financial stability looks under threat the bank may raise rates – or, presumably, cut them.

The market didn’t seem to like Carney’s comments. The FTSE100 fell 1.04 per cent and the British pound whipped around on a 300 pips range, which is a huge range. As I write, the unit is up about 130 pips to 1.5489 from 1630 AEST yesterday.

Forex moves elsewhere saw the Australian dollar up about 35 pips to 0.89997. The euro was also up about 30 pips or so, while the yen is at 96.4 from 96.97. Despite the yen’s strength, the Bank of Japan isn’t expected to announce more money printing at its meeting today. Not really much more to it – bond yields didn’t do much, with the US 10-year off 2 bps to 2.6 per cent.

So for today, the SPI suggests our market will fall 0.25 per cent. Data-wise, the labour force is the key release for our market. The consensus is that 6000 jobs were created in July, while the unemployment rate is expected to rise to 5.8 per cent. Not much other than that – we see some German trade statistics this afternoon, and then tonight we get US jobless claims.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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