Well first up, a huge congratulations to Tony Abbott and his team. A great victory. Let’s face it, the ALP failed dismally to govern the country and helped destroy confidence in the process. In my opinion, they committed an unforgiveable crime for an Australian government: created instability and uncertainty. This is why they posted the worst primary vote in 100 years. The sad thing is the spin that suggested they should take comfort in the fact it wasn’t as bad as expected! And there are plenty of people who still blame Kevin Rudd. With delusion like that, the Coalition might be in for some time.
Now the Aussie dollar, which currently sits at 0.9209, did start to push higher as results started flowing in – only modestly, mind you, up 20 pips or so and then again this morning. The market liked the change in government quite clearly and it’s about 80 pips higher from Friday afternoon. Not sure that we’ll see that impact mimicked for the stock market today given events on Friday night, but I’ll get onto that in a minute.
While we’re on the dollar, it’s worthwhile noting that for the new government, one of the quickest and easiest ways to restore some order and stability – and some confidence – is to put the smack down on those who keep pushing for a lower dollar. Put plainly, Abbott and his team should reintroduce some honesty back into economic policy. I know it’s not the global fashion at the moment, but it would reap significant rewards. The simple truth is that a weak dollar is not good for this country. It’s always associated with a weak economy or some crisis and it destroys the country’s purchasing power. Moreover, a deliberate policy to lower the exchange rate, outside of market fundamentals, scares off – has scared off – international investors.
In that light, the Reserve Bank's exchange target has proven to be bad policy and it needs to be withdrawn. The country needs stability – political stability and policy stability. This can be achieved simply. Firstly, scrap the exchange rate target and re-establish the Reserve Bank's focus onto medium term inflation and financial stability. The current conduct of monetary policy threatens both, and at its core is deceitful.
Fiscally it’s even easier. Be credible and sincere. By moving away from the spin and lies that had characterised the ALP’s approach, the country, citizens, and investors can have confidence in a medium-term plan to achieve a budget surplus. And it must be a medium-term plan rather than a frantic slash and burn approach being advocated by some. The Coalition has time on its side given the budget isn’t that bad – although the ALP should have left it in a much better position.
That out of the way, the reason I don’t think we’ll see a huge sharemarket impact today is because US markets were so subdued on Friday night – S&P500 up only 0.01 per cent, although they had every reason to rally hard in my opinion.
Take the US jobs report. Characterised as weak or disappointing, 169,000 jobs were created in August, which was lower than the 180,000 forecast. This is very positive growth. The unemployment rate slipped as well to 7.3 per cent from 7.4 per cent. Neither of those figures should stop the Federal Reserve tapering, although there is very good reason to think that it might.
Recall Ben Bernanke’s caveat on the unemployment target. As I wrote at the time, he effectively said that if participation didn’t improve then any fall in the unemployment rate would be viewed less favourably and might be grounds to delay the taper. Well, the fall in the unemployment rate this month was largely due to a drop in participation, which isn’t what the unemployment target is all about.
Unfortunately, Fed policy is so vague at the moment it’s hard to know what the implications are, and this wouldn’t have helped stocks. I, and many others, think they should still taper. Who knows what they will do though. For Friday's session at least, US bond yields were lower, down about 7 bps from the peak (of 3 per cent) to 2.93 per cent on the 10-year.
Naturally enough, Syria is still weighing on sentiment as well, although crude certainly got a boost, rising two per cent for the session to be at $110. Gold was otherwise up $13.5 to $1386 and copper rose 0.5 per cent.
For the rest of the week, markets will no doubt be governed by events in Syria and this never-ending discussion on the taper. However there is some hard hitting global data as well – mainly from China where we see inflation, industrial production investment and retail spending (Monday and Tuesday). For the US, the biggest release will be retail spending on Friday night. Otherwise, the key domestic data released this week will be Aussie employment on Thursday, with NAB’s business confidence survey out Tuesday and Westpac’s consumer confidence survey Wednesday.
Have a great week...
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.