Scoreboard: Taper angst

An upbeat Beige Book and strong growth in US jobs and housing sent taper fears through global markets.

The bad news is that stocks fell again overnight and once again moves were decent. In Europe the major indices were off between 0.3 per cent and 0.9 per cent, while on Wall Street we are looking at falls around the 0.5 per cent mark with an hour left to trade.

Taper fears are what the news wires are suggesting and I can see why – the 10-year US Treasury yield shot up 6 bps to 2.84 per cent for one. Underpinning it all though was phenomenally good economic data. The ADP employment report in particular showed very strong growth of 225,000 jobs and points to a commensurately strong payrolls number (Friday). Similarly, we saw new home sales surge 17 per cent over the September-October period.

Finally, the Fed’s Beige Book was generally upbeat, noting the economy expanded at a “modest to moderate” pace with manufacturers and retailers expressing optimism about near-term growth prospects. This is all good stuff and it makes sense that the Fed should taper. But whether it will is an entirely different question, separate from the economy’s actual performance.

It was interesting to note that gold then rose. Taper fears should have seen gold prices fall but instead we saw a solid $25 gain to $1246. Commodities actually had a decent session overall with silver up 4 per cent, copper up 2 per cent and West Texas Intermediate crude up 1.1 per cent, although Brent fell 0.9 per cent to $111.8. That mixed crude result occurred despite Iran apparently threatening to start an oil price war and pump out crude ahead of OPEC targets.

With that out of the way I should note that not all the economic data out of the US was positive. The non-manufacturing ISM index fell to 53.9 from 55.4 but with all the other positive indicators I’d put this down to statistical noise. In any case, US chief executives are reporting optimism at the highest level in over two years. The only the major data release was the US trade balance but there was nothing interesting in it – the deficit was at $40.6 billion ($44.57 billion) in October from $43 billion in September, with smalls gains in exports and imports.

For the remaining price action just note that the Australian dollar is at 0.9031 from 0.90689 at 1630 AEDT. The euro is unchanged at 1.3588, having hit a low of 1.3530, while the yen is off a bit at 102.16.

So then for our stocks today, the SPI points to a modest fall of 7 points. Data-wise there isn’t much – the Aussie trade balance at 1130 AEDT, while tonight we get the Bank of England and European Central Bank rate decisions (no changes expected).The key US data includes another third-quarter GDP estimate – expected at 3 per cent from 2.8 per cent in an earlier guess. There’s a bit of Fed speak (Richard Fisher) and of course jobless claims are out.

As for yesterday’s GDP figures, they were certainly much weaker than what the leading partial indicators had suggested. However they’re not that bad – I would categorise the economy as growing only slightly below trend. For a start, the extreme volatility of some figures is weighing on the total, so you can’t sensibly draw any conclusions from them. Otherwise, the fact is, and as I have argued for some-time, the economy is growing at a sub-trend pace, not because of the end of the mining boom, but because consumer spending has weakened considerably since last year.

With that in mind, the main issue – the main question policy makers need to address – is why consumer spending is so weak two years on from the first rate cut? Unfortunately, the right questions are still not being asked by policy makers or business commentators. I am heartened that some business commentators do seem to have finally realised what the primary driver of sub-trend growth is – confidence, ultimately – but they’re still not teasing that out to a final, logical conclusion.

The truth is, it’s absurd for the Reserve Bank to harp on about a rebalancing when the fact is we had a much more balanced economy prior to the easing cycle and when the currency was much higher. Consumer spending was stronger, dwelling investment was stronger etc. Policy makers and business commentators, if they are sincere, need to ask why the economy was in better shape beforehand. At that point the economy was set – all the metrics suggested that it would accelerate from that point. So what stopped that from occurring? It wasn’t consumer deleveraging and the like – if it were, this would have weighed on spending all the more when rates were higher.

It would be helpful if business commentators could think some of these issues through some more. Logically, methodically. Let’s not lazily refer to the common misperceptions and models which are very clearly wrong. They are inconsistent and not working. If commentators did do this, then we could start to hammer policy makers about their decisions – which is what the media should be doing instead of shouting “Huzzah!” regardless of what they do, and in the worst instances defending their mistakes. It’s about getting them on to the right page so they can finally start doing something good for this country. That’s what I would like to see. That’s what we need to see.

Three questions need to be answered. Why did consumer spending fall so hard after – that’s now two years after – the Reserve Bank started easing. From that it follows to ask, how will a lower exchange rate ‘rebalance’ the economy when exports are already strong? How will it lift consumer spending? How will a lower exchange rate lift non-mining investment? Anyone with any sense who wants good outcomes for this country needs to press the central bank’s board about these questions. It's only when logical, theoretically consistent answers are found – ones that that have actual support in the data – then we can then move on to heal this country.

Have a great day…