Scoreboard: Taper rethink

Markets saw decent falls on rumours that taper timing might be changing while competition from shale gas caused movement in the crude market.

I’m not sure what exactly is driving it. Most of the press I’ve read seems to suggest there has been a reassessment of the taper timing. Brought forward or something like it. Whatever it is, falls were decent though look to be clawing back into the close.

With an hour left to trade the S&P500 is off about 0.2 per cent (1768) the Dow is off 0.3 per cent (15,725), while the Nasdaq is 0.2 per cent lower (3912). Commodities in turn were smashed and moves were huge – gold fell $18 ($1362), silver was off 3 per cent, copper fell 1 per cent and crude slumped 2.2 per cent on WTI ($93.04) and 0.5 per cent on Brent ($105.9).

Keep in mind those moves in crude follow a report from the International Energy agency that Middle Eastern crude producers are being a bit complacent about oil investment. The IEA fear that the shale boom in the US – which they now say is less revolution and more surge – is driving down investment elsewhere.

The IEA are right to be concerned because the shale ‘boom’ in the US will do little for global energy production. So anyway the IEA are worried about a supply crunch and higher prices – and against that backdrop crude prices fall overnight.

Naturally enough energy stocks were the key underperformer overnight with financials and utilities following close behind. Otherwise the US 10 year bond yield pushed about 4 bps or so high (2.77 per cent as I write) which is a decent move in this environment.

The thing is I’m not really seeing any evidence the Federal Reserve is thinking of a taper soon. There should be no question of it though. On the economics there shouldn’t even be any quantitative easing. Strong jobs and strong growth – even the greatest Fed apologist can’t dismiss both of those results as ‘fluky’.

The Fed has a terrible track record of economic management though – historical fact – and they appear intent on following that same path. Just last night the Minneapolis Federal Reserve President Narayana Kocherlakota expressed puzzlement that expectations of a taper may have been brought in. That’s following the 200,000 jobs print – if you recall.

He said “from the perspective of a goal-oriented approach, the timing of this conversation seems puzzling.” And the reason he thinks that is because “reducing the flow of purchases in the near term would be a drag on the already slow rate of progress of the economy toward the Committee’s goals”. Funny, because the Fed has argued that tapering would not even represent a tightening in monetary policy.

Bits and pieces outside of that. The Chinese government released a communiquĂ© following the end of its four day plenum. In it the government reaffirmed the primacy of public ownership but noted that a “key issue was handling the relationship between the government and the market, allowing the market to play a decisive role in allocating resources”.

Otherwise inflation in the UK moderated to 2.2 per cent from 2.7 per cent, the Chicago national activity index was little changed at 0.14 (slightly higher) and the US small business optimism index fell a bit – to 91.6 from 93.9. For the price action, the Australian dollar is at 0.9291 from 0.9329 while euro is 38 pips higher to 1.3428.

So to the day ahead, the SPI suggests our stocks will fall 0.4 per cent. Data-wise we can look forward to consumer confidence at 1030 AEDT and then wages at 1130 AEDT. Confidence is still the issue here and yesterday’s business confidence slump doesn’t bode well. Although it is only just below average and recent volatility makes it hard to really draw any conclusions.

Consumers have every reason for confidence; so again, we should see very high levels of confidence. If only our policy makes could go on prolonged leave or something – just leave the country for six months or so. That’d fix things.  

Outside of that we see UK industrial production, the BoE’s inflation report and another Fed speaker

Have a great day…. 

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.