Scoreboard: Taper tilt

Well all that concern about Fed tapering seems to have been forgotten for the moment and Wall Street looks to be pushing higher. The bid started after a better-than-expected jobless claims report showed new claims at 325,000, down from the previous read of 344,000 and an expectation of 335,000. The four-week moving average is also low at 338,000.

The point of all those numbers is that they show an ongoing improvement in the US labour force and they point to ongoing strong jobs gains. It’s quite something then that stocks rallied, because normally the fear would be that this would bring on a taper. I can only assume the phones at the Fed were running hot and the key hard-core doves on the Federal Open Market Committee – Ben Bernanke, Janet Yellen and William Dudley – assured investors with that access, QE would be around for some time yet.

Actually, while we are on the never ending taper caper, the St Louis Fed President James Bullard made an interesting comment overnight. He suggested that the Fed’s decision to cut rates to zero in 2008 may have unwittingly committed the Fed to an extremely long period of ultra-low rates. He noted that the decision seemed to make sense at the time, although from his perspective he hasn’t seen any evidence it has worked the way it was intended.

Indeed he hinted it may have made things worse rather than better. I would agree 100 per cent and warned about it at the time that it was mistake. The Fed should have left rates at 2 per cent or more and the recovery would be stronger than it is today. And that’s saying something as growth is above-trend already. The key difference is that the Fed wouldn’t have the problems that it has today and monetary policy around the glove would be calibrated more appropriately.

Anyway, the Fed is stuck now and stocks love it – gains were solid at the time of writing, with the S&P500 up 0.8 per cent (1795), the Dow 94 points higher (15,995) and the Nasdaq was up 1.1 per cent (3962). By sector, financials, tech and energy stocks were the key outperformers, the latter getting a boost from a surge in crude prices (up 1.5 per cent on WTI to $95 and 1.9 per cent on Brent to $110). A few reasons are being offered for the crude spike, from technical to a drop in supply of heating fuels to the progress of talks with Iran – not doing that well maybe. Whatever the case, copper also had a good run, up 0.95 per cent, although gold fell a further $15 to $1243.

For the price action elsewhere, the Australian dollar is down around 0.9219 which is 80 pips lower than yesterday afternoon around 1630 AEDT. That the euro was up 40 pips to 1.3462 suggests Aussie-centric facts were driving the move, with the currency losing about two cents in 24 hours. Some of it was from the Reserve Bank governor Glenn Stevens’ speech last night on the Australian dollar, although the move was only 30 pips or so. The fact is the momentum was well and truly in in pace before the speech.

The speech itself was fascinating on so many levels. It’s clear from the governor’s comments that there is a very aggressive lobbying effort underway to intervene more aggressively in the currency. That he felt compelled to defend our floating exchange rate was interesting as well.  It was strange though because – and I could be misreading this given my own aversion to an exchange rate target – but it seemed to me that the Reserve Bank governor was actually presenting the case as to why we shouldn’t intervene.

Stevens didn’t seem to personally favour it and while he suggested that the “Australian dollar is currently above levels we would expect to see in the medium term”, he didn’t seem to think that misalignment was particularly severe. I would agree with him. But that begs the question as to who is driving this lobbying effort and where the evidence is.

It was notable that the governor didn’t highlight how a lower Australian dollar would lift consumer spending, lift non-mining investment or boost residential construction. And there’s a very good reason for that – it won’t. A lower dollar would in fact make it less likely we’ll see the above. What got the media attention though were his comments that intervention was on the table, although that’s not saying much – it’s always on the table, and there was no indication that the bank was closer to doing it.

Other than that, on the rates side US Treasuries initially shot up in yield after the jobless claim figures, up 4 bps to 2.84 per cent. The bid came on, bond prices rose and the yield fell. They ended up 2 bps weaker than yesterday at 2.78 per cent.

Bits and pieces otherwise: In Greece, the government submitted its 2014 budget to parliament in which it outlined an €812 million ($1.17 billion) primary surplus. Greece has otherwise met a primary surplus a year ahead of schedule, although the Troika suggest there is still a shortfall of €2 billionn. Just kicking the can?

Data-wise, the Philly Fed index fell to 6.5 from 19.8, although this survey is extremely volatile. Elsewhere, Chinese and European manufacturing PMIs were little changed.

For today then, the SPI points to a 0.7 per cent gain for our market. Otherwise we see little data for our region. Tonight it’s comparatively quiet as well with the German IFO and German GDP breakdown the highlights.

Have a great weekend…