Scoreboard: Tough love in London

UK stocks tumbled as the BoE flagged higher interest rates, while consumer confidence gave Wall Street a boost.

One of the more interesting features last night came from the United Kingdom. The talk is the Bank of England may be toying with a rate hike in the first quarter of 2014. How so? Because it is now forecasting a 50 per cent probability that the unemployment rate will be below the trigger point of 7 per cent at that time.

Indeed the latest UK employment figures released last night were encouraging. They showed the unemployment rate fell to 7.6 per cent from 7.7 per cent in the three months to September as 177,000 jobs were created. A great result, which follows jobs growth of 155,000 in the prior three months.

Perversely, the FTSE100 was off 1.4 per cent overnight on rate hike fears, while British pound was up 125 pips (1.6023). Keep in mind though that both the BoE and the Fed have said that even if their economic targets are met, they could keep rates low for a very long time. I would go with that neither bank, in truth, has economic targets. Fact.

In any case, the European Central Bank is going in the opposite direction and I doubt the BoE will hike as the ECB cut. So despite the Germans and Austrians and anyone else with a sound economy and strong public finances actually objecting to the ECB’s latest stimulus measures, some members of the ECB are talking of even more stimulus – negative interest rates and what have you.

I find it ironic that it’s countries with a terrible track record of economic management who set the policy trajectory. I would have thought it better to listen to policy makers in those countries with a track record of success – not the failures. It would be comparable to Australian policy makers taking economic advice from the United States – moronic!

Still, the talk of more stimulus did little to arrest the decline of European stocks, although falls were modest compared to the UK. The Dax was off 0.2 per cent and the CaC fell 0.6 per cent, while the euro whipped around on a 75 pips range (currently at 1.3463 – 20 pips higher than yesterday at 1630 AEDT). The unit initially dropped sharply on those stimulus comments, then rebounded to hit higher highs – all in the space of about two hours.

Over on Wall Street it was a different tone. Stocks perked up and gains were decent in some cases. The S&P500, for instance, is up about 0.4 per cent (1774) with an hour left to trade and the Nasdaq is 0.8 per cent higher (3949). The Dow is having a more modest session (25 points higher to 15,775).

There wasn’t really too much data or anything to really guide the market at this point – more buyers than sellers. That consumers stocks were the key outperformer perhaps points to a strong sentiment boost for provided from Macy’s Inc. Macy’s third-quarter earnings rose 22 per cent and the chief executive reckons the company is going into the fourth quarter with confidence.

Outside of that, energy stocks had a modest session considering the spike in crude overnight. Both WTI (0.8 per cent to $93.8 ) and Brent ($1.16) posted solid gains – perhaps on the growing realisation that there is actually no surge in global oil production. Elsewhere, copper fell hard –  down about 2.3 per cent – and gold was up smalls ($1273).

We saw a comparatively big move on US treasuries, with the US 10-year yield falling 5 bps to 2.72 per cent, which is very solid indeed given the absence of any data or news. I suspect a strong bid at an auction overnight probably helped, and of course the rally is probably some correction following the strong payrolls report – meaning the Fed isn’t going to taper. Maybe ever.

Looking at the Day ahead, the Australian dollar starts off at 0.98325, which is about 20 pips higher than yesterday afternoon. The SPI then points to a modest fall for our market (-0.2 per cent). Data is otherwise light for our session and not much better tonight. US Jobless claims and trade are probably the key releases, alongside European GDP numbers.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.