Following a fairly sluggish session in Europe (main indexes up 0.1-0.2 per cent), Wall Street looks to have found a decent bid with the S&P500 up 0.8 per cent (1653), the Dow 90 points higher (14,924) and the Nasdaq up 1 per cent (3648). Most of the gains had actually occurred prior to the Fed’s Beige Book (anecdotal report across the Fed regions), but this report wouldn’t have hurt, showing as it did that “national economic activity continued to expand at a modest to moderate pace during the reporting period of early July through late August.”
In particular, the report noted strong spending on autos and housing-related goods, timely as reports from a number of auto manufactures suggest very strong sales. Toyota’s US sales were up 23 per cent over the year, Honda’s 27 per cent, GM’s were 15 per cent higher and the expectation from these manufacturers is that sales could be the best since 2007. The US is back by the looks of it. By sector, healthcare, telecommunication’s, tech and industrials led stocks higher.
Now while equities had a good session, the same can’t be said about commodities, although it’s unclear why. China’s services PMI was stronger than expected yesterday and above the 50 mark, so that should have provided some support as should the Fed‘s Beige Book and those incredibly strong car sales figures. Then in the Middle East, a US Senate panel gave its stamp of approval for a strike in Syria. Yet gold fell $21 to $1390, crude fell 1.1 per cent ($107.14) and silver and copper were smashed as well – down 3.6 per cent and 1.8 per cent respectively. I guess Obama's promise to unleash crude oil reserves in the event of any Syria related disruptions may have dampened crude (although it shouldn’t as it’s not a credible threat – stocks aren’t that high and they aren’t in a position to release much) – but otherwise there were plenty of bullish factors and not many bearish ones.
Price action outside of that was fairly boring – the US 10-year Treasury yield was up a couple of basis point to 2.9 per cent then in the forex space, yen is little changed at 99.74 although euro had a bit of action, one way and up about 50 pips as I write to 1.3207. As for the Aussie dollar? Well it looks like global investors think prospects for our economy are better than we do ourselves – or at least our policy makers. Following the GDP figures yesterday, they Australian dollar has been on an upward trend, putting on 120 pips since yesterday morning (0.9172). This highlights a simple fact – strong dollar, strong economy. That’s the way it works. My concern is then, that policy makers will feel compelled to talk the economy down – and they are doing a great job – given the exchange rate target. They want a lower dollar and decent economic growth is inconsistent with this.
Was growth decent? It was OK I guess. Below trend for sure, but they were interesting namely because they offer no support to this whole narrative being spun on growth. End of the mining boom and the like. Certainly growth is below trend – just – but this is mainly because consumer spending growth has declined sharply over the last year.
In my opinion and as regular readers will know, I suspect this slower growth is a side effect of the Reserve Bank’s exchange target and the aggressive series of rate cuts we’ve seen. Certainly the slump in spending does coincide with the easing cycle, which is odd as lower rates really should stimulate growth – unless those cuts themselves destroy confidence, which is what they have done. And why would they destroy confidence? Because rates were already very low and the rhetoric used to justify the cuts scared people. That’s not to forget the fact that a lower dollar makes the country less wealthy.
As I’ve argued before, and we’re seeing this in the data – the adoption of an exchange rate target was very foolish. Hopefully the board will wake up to itself. Confidence can return at any point and there is no reason why it shouldn’t bounce back hard and Australia see record solid growth rates. The Reserve Bank's role in this would be to do nothing and stop alarming people. More broadly, people should not take seriously the alarm over the end of the mining boom. For the second half then growth is a bit of a lottery – the planets are aligned for strong growth - whether we get that will depend entirely on confidence – the conduct of our policy makers and business leaders.
Looking at the day ahead, there isn’t really much for our region. Aussie trade data at 1130 and the Bank of Japan’s meeting. In fact I guess it is a big day for global money printing central banks, because the ECB and the BoE meet as well – no policy action expected from any of them. Other than that we get German factory orders and a solid run of US data – ADP employment report, jobless claims, the non-manufacturing ISM, factory orders plus a couple of Fed speakers.