SCOREBOARD: Spoon Fed

Fed minutes signalled to the market that QE3 is just about a done deal, despite recent stronger data.

There you have it. There had been some chatter that the stronger run of US data would forestall another round of quantitative easing from the Fed. I argued at the time that people suggesting this were being far too sensible and that does indeed appear to be the case.

So the Fed looks set to embark on another round of QE according to the latest minutes, and from my read they’re basically saying it’s a done deal. The clincher is in the following few lines in which "many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” The critical words there are substantial and sustainable.

This makes any economic assessment sufficiently vague so that the Fed could discredit any pick-up in activity as not being strong enough. Moreover, even if by some miracle the consensus is that a pick up is strong, they can (and will) still make the case for printing by arguing that the lift in activity isn’t sustainable. Either way and under any scenario, the case (albeit exceptionally flimsy) has been made for the Fed to print.

While the Fed discussed a number of options they could take, the majority seem to support buying either treasuries or mortgage backed securities. I guess we’ll find out more about the process and the timing when Bernanke speaks at the Jackson Hole conference on August 31. The minutes were more just about signalling to the market that QE3 is a done deal and laid the ground work for why the Fed will still print despite the pick-up in activity.

Prior to the minutes, US equities had followed the European lead and sold off (the Dax was 1 per cent lower, the CaC was off 1.5 per cent and the FTSE -1.4 per cent), magnitudes were smaller though and the S&P500 was still only off about 0.3 per cent or so at the low. After the Fed minutes, equities found a modest bid and the S&P500 managed to finish off in positive territory, if only just ( 0.02 per cent to 1413.49) and it was the same story for the Nasdaq ( 0.3 per cent to 3076). The Dow however finished down -0.2 per cent although at the low had been off 0.6 per cent.

Commodities were then mixed, metals were all higher with gold up $14 to $1656, silver rose 0.4 per cent and copper was up 0.6 per cent. Crude was down a touch (-0.1 per cent to $96.55).

In terms of the other price action it was all about the FOMC. US Treasuries obviously rallied hard, with the yield on the 10-year falling just under 9 bps to 1.69 per cent, while the 5-year was off 8 bps to 0.69 per cent. The 2-year sits at 0.26 per cent. Australian futures then followed suit and the 3s rallied 8 ticks to 97.32, while the 10s were just under 8 ticks higher at 96.78.

Then for forex the US dollar was weaker after the FOMC minutes which saw the Australian dollar shoot up 60 pips straight after to sit at 1.05. The euro was 50 pips higher at 1.2517. Sterling then rose 85 pips to 1.5864 while Yen is at 78.53.

Bits and pieces otherwise, Euro group head Junker said Greece was facing its last chance to get things in order, but he didn’t rule out an extension for Greece, stating that it was up to EU and IMF lenders. He also said he was against Greece leaving the euro zone.

There wasn’t a lot else though. For the US, existing home sale rose 2.3 per cent in July after a 5.4 per cent decline.

For the Australian market today, the SPI suggests our stocks will get a very modest boost, that index up 0.2 per cent (4370). Otherwise the calendar today shows there is little for Australia in the way of data – housing affordability is it – and not much for the region.

Some minor indicators such as the flash manufacturing China PMI. This indicator while poor, does get media attention and given all the talk about a hard landing in China and the end of the mining boom might get a touch more. This afternoon we see the German Q2 GDP breakdown, we see the European August PMI’s tonight and then for the US, initial jobless claims and new home sales.

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.

Follow
@AdamCarrEcon on Twitter.

Related Articles