SCOREBOARD: QE curveball

Global stock markets sold off overnight as debate raged on over the probability of QE3.

Global equities sold off last night as the news flow took a turn for the worse. Added to that, the non-voting St Louis Fed president expressed some doubt about another round of QE. James Bullard has been much less dovish than some of his (more radical) counterparts and said that if it was up to him there would be no further bond purchases at this point. He went on to note the improvement in the data and seemed to think that markets were pricing in a higher probability of QE than was warranted.

Even Mitt Romney threw his voice behind the 'no further bond purchases' line, stating that it would be the "wrong way to go". We’ll see, but I think the bar for no action was set at a very high – implausibly high – level. Either way, his comments contributed to the negative sentiment and at the bell, the Dow and the S&P500 were down 0.8 per cent (13064 and 1402 respectively), while the Nasdaq was 0.6 per cent lower at 3056.

There was a bit a data out and overall it was quite good. Jobless claims rose, sure, but only to 372,000 from 368,000, which is still consistent with solid jobs growth. In the environment that we’re in – the perma-fear over stall speed growth – numbers around this level are very good as they are in inconsistent with stall speed growth.

Even better data came from the Federal Housing Finance Agency, which showed house prices posted their biggest gain in over six years. Prices rose 1.8 per cent in the June quarter, which is yet another sign that the economic recovery is picking up. At this point, remember the key two words out of the FOMC minutes – substantial and sustainable. The retort to this data is that it will prove unsustainable, so in my opinion the Fed will overlook this data.

Commodity markets, metals at least, don’t seem to think that QE has been taken off the table and gold shot up another $31 to $1672. Silver then rose 3.1 per cent and copper was 0.5 per cent higher. And that’s with the pessimistic reading of the ‘flash’ PMI estimate for China yesterday (47.8 from 49.3). Most likely there is a bit of confusion about it though as crude took a decent dip (-1.3 per cent to $96).

Over in Europe, equity markets were as sour as in the US and the major indexes finished nearly 1 per cent lower on the Dax, and 0.8 per cent lower on the CaC, although the FTSE finished flat ( 0.04 per cent). Obviously there were concerns here about further money printing, but there seems to be a bit of a catch 22 developing on the Greek front as well. EU leaders have been vocal in suggesting that this is the last chance for Greece and that they must demonstrate their commitment to reform – privatisations are key to this. However the Greek prime minister made the not unreasonable point that it was impossible to privatise any state assets while everyone, including some EU leaders, were talking about a Grexit.

As for other price action, the Australian dollar was off about 60 to 70 pips (1.044), the euro was 30 pips higher (1.2561), while sterling and yen are at 1.5860 and 78.49. US treasuries then pushed a little higher but there wasn’t too much action. US 10-years for instance traded on a 4 bps range and ended about 1 bp lower at 1.68 per cent. The 5-year yield was unchanged at 0.69 per cent while the 2-year is at 0.27 per cent.

In terms of other news and data, the final estimate of German GDP showed domestic demand fell for the quarter on the back of solid declines in investment. Exports and imports were strong though, as was private consumption. For the rest for Europe, the PMIs were largely unchanged at 46.6 in August from 46.5. These indicators aren’t very useful in determining the economic state of play though.

For the data today we have the RBA governor’s testimony to the House of Representatives Economics’ Committee. Usually the initial statement made is similar in tone to the RBA’s statement on monetary policy, so I wouldn’t look for too much of a departure here. What does it matter in any case, people? The boom is over, we’re doomed. Run for the hills!!

The hours of Q&A that follows can be useful, but that completely depends on the quality of the questions. Often the whole process turns into a point scoring exercise between the major parties, which of course is of little practical use. We’ll see. All up though it is unlikely that the governor’s answers will deviate from the statement.

That’s about the lot, so have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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