SCOREBOARD: QE3 ahead

Bernanke's testimony proved a dampener overnight, but it did nothing to alter expectations of more Fed easing.

After the excitement of yesterday’s session, it looks like punters are sitting back and waiting for tonight’s payrolls.

Treasuries, for instance, have done very little – 2-3bp range on the 5-year and 10-year, with those notes down about that from 1630 AEDT at 1.82 per cent and 0.71 per cent respectively. The 2-year yield was up smalls to 0.222 per cent. And that’s despite more good data out of the US. Jobless claims, for instance, fell again – 12,000 to 367,000 – while continuing claims were down over 100,000 to 3.67 million. Then the ICSC reported that US retail sales accelerated in January, rising 4.8 per cent year-on-year from 3.5 per cent previously, with particular strength in the luxury segment, although all components showed decent sales growth.

One key dampening influence was most likely Bernanke’s testimony to the House Budget Committee. Bernanke’s speech did nothing to sway the consensus view that QE3 is just around the corner, despite what is a decent acceleration in the US recovery and sticky inflation pressures. Remember it’s not about the economics – this is political (debt monetisation, etc). So Bernanke really only paid lip service to the lift in the data, and in particular played down the rebound in consumer spending and inflation. All of which confirms the Fed’s intention to print more money for mine – recall they did the same thing in 2010 by effectively ignoring most signs of recovery and printing anyway. Timing is the issue and I think most people reckon it’ll happen when Operation Twist ends. Chicago Fed President Evans (massive dove) for his part reckons the Fed should buy up more MBS and Treasuries and be as "aggressive as imaginable”. Not surprising then that there are rumours that the Fed’s Fisher (hawk) has bought up about $1 million in gold ETFs.

Other than that, we saw some positive rhetoric from China on Europe. Premier Wen Jiabao suggested that China is considering increasing its participation in the rescue funds, which would be great news considering they hold about $3.2 trillion in forex reserves. Euro was up a big figure on the news (to 1.3187) but has eased off some since (1.3141 or down 30 pips from 1630 AEDT). Forex moves otherwise weren’t huge – Australian dollar off smalls to 1.0709, sterling down 40 pips to 1.5801 and yen at 76.19.

As for equities, they’re not really doing a great deal. On Wall Street, the S&P index has bounced, so far, around zero (up 0.4 per cent at the high and down 0.2 per cent at the low) and is currently up 0.1 per cent (1325) with an hour left to trade. Financials, energy and basic materials seem to be the key outperformers so far, although it's important to note that crude prices were mixed – WTI down 1 per cent to $96.55 on higher inventories, while Brent was up 0.6 per cent ($112.2). Otherwise the Dow is off smalls (12712), the Nasdaq is up 0.4 per cent (2859), while the SPI is flat at 4239.

Not much else to tell you. Looking at the day ahead, there isn’t much for Australia or New Zealand. Migration data for NZ at 0845 AEDT but nothing to speak of for Australia. The big one for the market tonight is obviously payrolls. The market looks for a 144,000 increase in January payrolls, while the unemployment rate is forecast to remain steady at 8.5 per cent.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter

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