SCOREBOARD: Unnecessary reservations

Chicago Fed president Charles Evans painted a solid picture of the US recovery, while giving reason to think QE won't be pulled back any time soon.

Well there wasn’t a great deal of action overnight for punters. US stocks ended slightly weaker, with the S&P500 off 0.1 per cent (1666), the Dow down 23 points (15,330) and the Nasdaq also 0.1 per cent lower (3495). Energy and basic materials were the key outperformers for the session and that follows a lift in commodities for a change - crude was up 0.7 per cent ($96.7), copper 0.9 per cent higher and gold up $28 to $1392.

The main news for the session was that the President of the Chicago Fed, Charles Evans, gave a speech in which he noted that the US economy had improved quite a lot and that he was optimistic that unemployment would continue going down. That said, and despite the substantial improvement that the US economy has undergone, he said two things which I think highlight why the Fed won’t pull back on QE soon. Firstly, he noted that monetary policy was set correctly, despite his view that things had improved “quite a lot”. Moreover and after years of solid improvement, Evans said that the question is still whether “the improvements that have been made will continue and be sustained”.

I don’t think that following years of solid improvement and noting the current solid momentum that the US economy has, that those doubts he expresses are really valid, especially as no reasons are offered for why it is reasonable to be concerned that the recovery won’t be sustained.  Ideally policymakers should have reasons and list them, not make statements. On the current ‘low’ inflation that some point to as a reason, even Evans notes that the dip is likely temporary and the fact is that on an underlying basis inflation isn’t too far below the Fed target. Regardless, the key thing to note is that the Fed is making the case for why, despite the great numbers of late and the wide expectation that it will pull in QE, they actually won’t. They will say they need more time to see if economy is recovering or not and in Evans opinion, self-sustaining growth won’t be seen till 2014, although he also notes that in the absence of the fiscal drag growth would be 3.5 per cent, which is something I’ve pointed out myself. Thing is, 3.5 per cent is great growth. As I’ve said before private demand is doing very well indeed, which is why we are seeing such strong jobs growth.

While US Treasuries didn’t react in the end (initially yields fell, 4 bps on the 10-year, but they recovered to end little changed at 1.96 per cent, 0.84 per cent and 0.25 per cent on the 10, five and two-year respectively) the USD weakened on those comments. The Australian dollar is about 40 pips or so higher at 0.9806, the euro is also up 40 pips to 1.5258, while Japanese yen is down to 102.30 from 102.67. Japan’s government has reiterated its target for the yen it nutted out with the US of about 100, after it noted recent moves above were probably not good for the economy and that it was important yen not weaken too much.

Over in Europe most of the news-flow is about this probe into price manipulation in the energy markets. The probe is being widened it seems, but there wasn’t a lot else - stocks had a better session and the Dax was up 0.7 per cent, the Cac and FTSE up about 0.5 per cent.

For today then, the SPI points to a 0.1 per cent rise for Aussie stocks, but apart from that there is little. We get the Reserve Bank minutes at 1130 AEST where I expect them to play down prominence of the Australian dollar in their deliberations. There’s not really too much more we can learn from the minutes though. The Reserve Bank forecasts soft growth and modest inflation over the next two years, in what effectively amounts to a statement that monetary policy is not working. How? Because rates have been cut 200 bps to a record low and yet the growth and inflation outcomes are still modest - growth possibly below trend. At most not much above.

Outside of that we see German producer prices and UK inflation statistics - consumer and producer prices. In the US, the New York Fed President and ultra- dove William Dudley speaks.

Have a great day…

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