As I write, with an hour to go, Wall Street is putting in another solid performance. We’re looking at gains of around 0.9 per cent for the S&P 500, sitting at 1442; the Dow is about 88 points higher at 13324, while the Nasdaq is up 1.4 per cent at 3051.
All roads have led to the fiscal cliff recently and last night was no different. I mean risk on, risk off already tells you that the news on said cliff isn’t all that bad anymore. I dare say hope is the predominant emotion. Some good old Christmas cheer.
So it is that John Boehner and Barack Obama are getting closer to a compromise. Recall that taxes on the wealthy are the main sticking point – Obama wants higher taxes to kick in for those who earn over $250,000, while the GOP had suggested $1 million – how can people even live on less, right?
Anyway, Boehner has now offered $400,000 as the threshold, which is obviously a big signal that a compromise will soon be reached. Woohoo.
Over in Europe there wasn’t much. One piece of big news is that it looks like someone has gone limit long Greece. Standard & Poor's came out and issued an upgrade – that’s an upgrade on Greece. Albeit this was from selective default to B- following the bond buyback, but it’s still an upgrade. I can’t quite remember who was running around saying a Grexit was a 75 per cent probability, but I think there is a 90 per cent probability that kind of commentary is looking a little rash right now. Good that we haven’t seen the old 'kicking the can' chestnut either.
So it was that news and fiscal cliff joy that saw European stocks up as well – with the Dax up 0.6 per cent, CaC up 0.3 per cent and FTSE100 up 0.4 per cent. Apart from that Spanish and Italian bond yields fell almost 10 bps apiece, with 10-year yield at 5.3 per cent and 4.39 per cent respectively while the euro was up 50 pips to 1.3225.
Forex moves elsewhere saw the Australian dollar little changed at 1.0530, the yen is at 84.225 from 83.99, while sterling is at 1.6250 (up about 40 pips). Gold is then off $28 to $1670, copper fell 0.6 per cent, while crude rose 0.9 per cent. Finally, on the rates side US treasuries sold off, with the 10-year yield rising 5 bps to 1.82 per cent. The 5-year then rose a basis point or so to 0.76 per cent, while the 2-year is at 0.28 per cent.
Now as for the Reserve Bank’s minutes yesterday, it turns out that it was a close call and that fear over the end of the mining boom was the primary driver of the eventual decision to cut. If you actually read the minutes a reasonable person – which excludes most economists and commentators – would probably be surprised at the end decision. As a test, send the minutes to someone of reasonable intelligence (by definition that excludes economists and economic commentators) in Upper Volta who isn’t aware of the decision.
Okay I’m kidding; ask someone in the US who isn’t aware of the RBA’s decision – fine, your next door neighbour – and get them to read through the minutes less the last para and ‘the decision’. Ask them what action they reckon the board took, based on what they read. I mean, the board noted that since the last meeting global growth had picked up and that domestic growth was around trend. While they couldn’t bring themselves to say it, financial markets as we know were more stable.
All the while the cash rate is at its lowest point since the late 1960s (ex GFC) – the same with lending rates. To consequently suggest there is "nothing to see here people” as the government and the RBA like to do, is more than a little ridiculous. But it is perhaps indicative of a the growing awareness among policy makers of the destructive influence rate cuts are having on confidence. Maybe.
Anyway, the decision to cut was based entirely on this idea that the mining boom had busted. But then think about when fears of said bust came about. If you are honest it wasn’t any capex data, or any data really, that showed the mining bust – the capex data suggest investment will surge another 20 per cent next year.
In any case the public discussion predated that data. The truth is it was the sharp fall in iron ore prices that sparked fear over the mining bust – that’s when stories first appeared in the press. It’s that simple. The board once again have simply reacted to the latest bout of fear. The embarrassing thing is iron ore prices have rebounded. This is why the economic view simply doesn’t matter as far as the Reserve Bank concerned. Rates are going lower anyway and any old thing, no matter how ridiculous, is being used to justify it.
Against that backdrop I found Glenn Stevens' interview in the AFR today quite bizarre. I can’t reconcile the lowest rates since the 1960s with his comment that we can’t let inflation go higher in this country. He said "my intention would be to remind people how hard it was... and how long it took, and how painful it was, to get it down” .
Regular readers will recognise that this is exactly what I have argued myself since 2009. It is the reason why I think excessively low rates are a risk not worth taking when we have strong growth and low unemployment.
This is something Australian economists don’t understand – economics! The pain that Australia had to go through to get inflation down and we weren’t even going through hyperinflation. Inflation was still single digits. Propagandists still sit there saying what’s the worry, inflation is low. It's mid band actually with ultra-low rates. People need to think ahead, plan for the future and take a balanced approach. No one seems to be doing this in Australia. Extremism is the new norm – cut rates – lower, faster harder! Burn the witches!
Moving on, the SPI suggests the All Ords will be up around 0.6 per cent today to 4630 AEST. The calendar shows little data of note for Australia, so most of the interest will be abroad. The Japanese put out some trade data just before 1100 AEDT, while tonight’s key data comes from the German IFO survey. In addition we see the eurozone current account, and then over in the US we get housing starts.
Have a great day…
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.