Scoreboard: US Snailmate

US stocks slipped overnight – but not enough to push Washington to a deal – while the Reserve Bank made its minutes hard to interpret.

As I mentioned on Monday it looks like the US is all set to miss the October 17 deadline. The problem is that markets are just not taking this seriously enough – so the brinkmanship has to intensify (Why America needs the markets to crackOctober 16). Thus the critical deadline of October 17 will likely pass.

As it is, markets are still biding their time, waiting for the pantomime to finish. We have of course seen it many times before, so it’s understandable if punters are a little tired of what is ultimately a completely fabricated, or manufactured crisis.

The latest is that the House and the Senate have different budget plans, with the Senate delaying its plan until the House can decide what it wants. Thus far, the House Republicans are not content with what they know of the Senate plans as they give too much away to President Obama, while the Senate and the Whitehouse are not happy with the Republican plan because it continues to make an issue out of Obamacare. Stalemate. John Boehner, the Republican House leader, seems to suggest the House is paralysed by indecision, stating: “There are a lot of opinions about what direction to go … there have been no decisions about what exactly we will do.”

Still, falls were reasonable overnight and at the time of writing (about 30 minutes left to close) the S&P500 was off 0.4 per cent (1703), the Dow had fallen 81 points (15,219), while the Nasdaq was down 0.3 per cent. By sector, industrials, consumer stocks and utilities seem to have taken the brunt of the damage.

Otherwise price action was subdued. The US 10-year yield was up about 3 bps to 2.73 per cent and commodities hadn’t done much – gold was up $5 to $1281, crude down 1.4 per cent to $100.98 and copper flat. Forex moves were similarly subdued, with the Australian dollar hovering around 95 cents where it was yesterday morning, although it’s down from a peak of 0.9547 reached after the Reserve Bank’s board minutes. The market has started pricing in rate hikes for next year and of course I think that’s entirely reasonable.

In my opinion the cash rate should be at least 100 bps higher now – that would be the prudent policy stance given our economic metrics. Yet the board’s exchange rate target makes policy opaque and it’s virtually impossible to pick with any degree of confidence what the next move will be. That’s why there is a fairly decent market divergence and why so many economists have back-flipped. Yet there is no consistency in the market at the moment or in any analysis.

So for instance, if you look at the reasons offered for rate cuts, they are all still there. Nothing has changed, and in fact conditions have deteriorated on that line of reasoning. So why isn’t the Reserve Bank cutting further? Because of house prices? Yet with rates so low, rising house prices are entirely predictable – what did the bank think was going to happen? It is something that should have been considered before cutting rates so low.

This inconsistency is driving the current market divergence and it seems quite clear that no one really knows what the Reserve Bank’s view is or what the emphasis or targets are. That in it itself is a terrible way to conduct economic policy – confusion reigns.

Anyway, outside of domestic policy issues, the euro is off smalls at 1.3521 and the yen is at 98.34. Nothing much there, and that’s pretty much it really. The only other news flow included comments from the Fed’s Richard Fisher, who reckons an October taper is not going to happen. Nothing new.

Data-wise, UK inflation remains well above target and was stronger than expected, rising 2.7 per cent annually in September. Then in Germany we saw the ZEW economic sentiment index rise to 52.8 from 49.6 – well above the average of 24. Finally for the US, the Empire State manufacturing index fell to 1.5 from 6.3.

For today, the SPI points to a modest fall for Aussie stocks of about 0.3 per cent, although that follows a 1 per cent gain yesterday. Otherwise there is little data worth noting in our region.

Tonight, the key US data includes housing starts and the Fed’s Beige Book. The NAHB housing market index is also out.


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