Turns out the absolute certainty — ‘the taper is done and dusted this week’ — was less the Federal Reserve private briefing and more just posturing by some commentators. As I mentioned on Monday, the actual data flow (well the Fed’s interpretation of it) and Fed’s public rhetoric always made for a high probability it wouldn’t taper at this meeting. Indeed the Fed did decide instead to ‘await more evidence that progress will be sustained before adjusting the pace of its purchases.’
And didn’t markets love it.
Precious metals surged — gold spiked $56 to $1365 and silver was 6 per cent higher. Elsewhere, copper rose almost 3 per cent and crude wasn’t too far behind up 2.5 per cent ($108). The US 10 year bond in turn surged, the yield falling about 16 bps in the space of an hour — massive. Needless to say the Australian dollar had a strong bid as well, or rather USD was sold, and as I write it sits at 0.9512 or about 1.5 cents high than yesterday afternoon.
Now in terms of the Fed’s economic assessment, it reckons ‘economic activity has been expanding at a moderate pace’ it noted ‘some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth’.
That pretty much sums it up. To hammer home the point that it needed more time to assess the rebound, it downgraded its growth forecasts. The Fed had thought that economic growth would be between 2.3 per cent and 2.6 per cent this year, but now it thinks it’ll be between 2 and 2.3 per cent and between 2.9 and 3.1 per cent next year. Still decent rates of growth mind you — slightly below trend this year and well above next. Their forecasts on unemployment and inflation were otherwise little changed — unemployment between 7.1 and 7.3 per cent this year and 64. To 6.8 per cent next. Inflation is still expected to be low next year — 1.3 to 1.8 per cent.
More broadly, and as I’ve mentioned in the past, the Fed doesn’t want to see bond yields spike. Bernanke gave a hint about his concern — some months ago — when he said rising bond yields were unwelcome at this point. That’s not to forget the concern at the Fed, that the falling unemployment rate isn’t necessarily great news, driven as it is by declining participation.
So, when might the Fed start the taper? Well there are only two meetings left this year. October 29-30 and then December 17-18. I’d put equal odds on both at this point with a very high probability of nothing.
Now over on Wall Street, the champagne came out and the S&P500 surged 1.2 per cent to a new record high (1725). The Dow was then up 0.95 per cent (15,676) and the Nasdaq rose 1 per cent (3783). By sector, basic materials, utilities and tech stocks were the key outperformers, although suffice to say it was a good session all round. Not much more to it than that — European stocks had a less robust session, although the Dax, rising 0.5 per cent did hit a new record. Otherwise , the CaC was 0.6 per cent higher although the FTSE100 fell 0.2 per cent. Our own SPI is 1.1 per cent higher.
So to other news — US housing starts rose about 0.9 per cent in August, after a 5.7 per cent surge the month prior, while euro zone construction output rose 0.3 per cent after a 0.9 per cent increase the month prior.
Finally, American car manufacturer General Motors has issued an ultimatum to Australian taxpayers — give us more welfare or we will leave. The issue of course is why would Australian taxpayers be subsidising an American firm in the first place? Better, if we are going down the corporate welfare route — which I think is atrocious — to at least give that money to an Australian company. Moreover, even if policy makers are still intent on providing subsidies to foreign firms — then at least put it to tender. There are other car manufactures out there — even other manufacturers in industries who might prove to be more successful than General Motors have been, in making a contribution to this country. And that has to be the benchmark.
For the market today, there isn’t a lot in the way of data. NZ GDP numbers are out this morning followed by Japanese trade figures. Tonight there is a run of US data — initial jobless claims, existing home sales, the Philly Fed index and the current account.
Hope you have a great day…
Adam Carr is a leading market economist.