Scoreboard: Summers' solstice

What Larry Summers' decision changes for the Fed is unclear, but global investors were still excited by the unusual move in finance heavens.

Larry Summer’s withdrawal from the race to the Fed Chair seems to have caused a stir. It’s fair to say that the new front runner, Board Governor Yellen, is extremely dovish and has been key in watering down the Federal Reserve’s ‘economic targets’ for over a year now. What her appointment would actually change is unclear though – I don’t think much.

It’s not like Summers is some über-hawk (or even a little one): he was advising Obama through the GFC. In any case, Yellen’s nomination is not assured and Donald Kohn, a former Vice Chairman at the Fed, is also a strong candidate – and also dovish.

All the talk did get hedge funds excited however, and this was the reason why the Australian dollar shot up a cent yesterday morning. It’s still up over 93 cents, but only just at 0.9316 – down about 10 pips from yesterday afternoon. Even for last night’s price action, Summer’s withdrawal is being cited as a reason global stocks rose. And the bid was decent, especially in Europe where the main indices were up 1.2 per cent on the FTSE100.

I suspect that solid US industrial production figures also played a part though – as well as the Syrian deal between Russia and the US. In a further sign of a rebounding economy, production rose 0.4 per cent with manufacturing production up 0.7 per cent – the biggest rise in six months. So we’ve got an accelerating economy and a more dovish Fed (maybe). The S&P500 finished 0.6 per cent higher in any case (1697) with the Dow up 118 points (15,494). By sector, industrials, financials and basic materials were the key outperformers, although tech stocks were the only major sector in the red – Apple was down 2.3 per cent on news that China telecom was reducing its subsidy on the new iPhone. Overall the Nasdaq fell 0.31 per cent at the close (3717).

Price action elsewhere wasn’t all that exciting – metals had a modest bid. Gold had a very modest rising of about two bucks to $1310. Silver was up 0.5 per cent, copper rose 0.3 per cent and crude fell nearly 2 per cent ($106.11) – perhaps correcting in the wake of the Syrian deal. The US 10-year bond yield is then at 2.86 per cent from 2.88 per cent on Friday and for the major forex rates – euro is down 30 pips from yesterday afternoon at 1.3334. Sterling is then about 55 pips lower at 1.5899 and yen is at 99.06 from 98.73.

That’s it really. For today, it looks like Aussie stocks could weaken and the SPI is off 0.3 per cent. Otherwise, the major news comes from the Reserve Bank’s minutes (1130 AEST), although these will probably pass without notice. The Reserve Bank has an exchange rate target, it thinks the Australian dollar is too high and that was when it was around 89 cents!

So this statement will be vague but on the dovish side I suspect, and little changed from last time. The risk that the Reserve Bank poses to the rest of the economy is that in their efforts to jawbone the Australian dollar lower, they risk damaging the ‘nascent’ recovery in business and consumer confidence. The only way to weaken the dollar is to harp on about how slow growth is here or how we are borderline recession. There’s nothing more likely to put the smack-down on confidence than the Reserve panicking over something or rather.

Other than the minutes, we see Australian car sales at 1130 AEST. Tonight the global data includes the German ZEW survey, Eurozone current account, US and UK inflation figures.

Have a great day…

Adam Carr is a leading market economist.

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