The Overnight Report: Double Fizzer

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By Greg Peel

The Dow closed up 163 points or 0.9% while the S&P gained 1.1% to 2163 and the Nasdaq rose 1.0%.

QQE?

If it’s not bad enough that half of media reporters and commentators, including on business television, cannot pronounce the word “quantitative” (here’s a clue guys, it’s not “quantative”), the Bank of Japan yesterday introduced a new monetary policy tool called quantitative qualitative easing, or QQE.

That’ll get some tongues twisting.

QQE will form part of a new package from the BoJ, which is really not a lot different to the previous package but for a bit of tweaking. Importantly, the BoJ did not cut its cash rate further into the negative. Aside from the current -0.1% not having worked, negative rates represent a tax on banks and entry in the great unknown that has investors very concerned.

The BoJ will retain its level of bond buying, or QE, but will drop the 7-12 year duration range so it can fiddle with the yield curve – QQE. By buying shorter durations the central bank will lower short term rates and thus steepen the yield curve out to longer term rates, which is positive for banks and wealth managers, and somewhat akin to the Fed’s “Operation Twist” of a few years ago. Purchases of stock market ETFs will also continue.

How was this received? Well, with a sigh of relief that there was nothing scary in there, and with a general shrug of fair enough, they’re at least trying to do what they can. The Nikkei closed up 1.9%, underscoring the belief this is a pro-equity policy move (in the form of TINA, of course).

The Australian stock market was already positive ahead of the BoJ’s announcement mid-afternoon, and kicked higher on the news to a solid close. Sector moves were relatively consistent, although it’s been a long time since we’ve seen industrials (1.3%) and consumer staples (1.0%) providing leadership. The banks (0.8%) provided the market cap clout.

The only loser on the day was telcos, given TPG Telecom’s ((TPM)) shock guidance has sparked a rethink for the sector. Selling continued in TPG yesterday, and peer Vocus Communications ((VOC)) is also being caught in the downdraft.

At the end of the day it was a strong session one might not normally expect ahead of a critical Fed meeting, but in retrospect the right move. For the time being the ASX200 has put 5300 behind it and will begin to eye off 5400 once again.

Mixed Messages

The Fed didn’t hike. Given a hike was only being ascribed a 15% chance ahead of the meeting this hardly comes as a surprise, but there would have been some nervous traders holding their breath given talk of the central bank trying to retake control with a surprise announcement.

Clearly Janet Yellen is not into surprises.

She is into repetition, nonetheless. Yes, she still expects there will be a rate rise in 2016. The November meeting is “live”, as is every meeting, but nobody expects a hike ahead of the election. So, it’s December. Lock it in.

Except that as ever, the Fed remains data-dependent. In this point the Fed’s focus has changed somewhat. No longer does the FOMC see the headline unemployment rate as a viable target, given the hidden rate of underemployment in that which is providing the clue as to just how much slack remains in the US labour market. So ignore the 4.9%.

Focus instead on the underemployment rate, participation rate and level of wage growth, which are all as important as that base number of jobs added the world focuses so heavily on each month.

So on the one hand Yellen remains hawkish – a rate hike is expected – but on the other dovish – employment is not yet where we want it to be. Then there are the “dot plots”, which this quarter suggest a sizeable cut to prior rate expectations for 2017-18, and also a cut to GDP growth expectations to benign levels of around 1.8%. From these we can deduce the Fed will deliver one rate hike this year, and then perhaps the next one will also take a year.

There were three dissenters among FOMC members, who wanted to hike now.

So it was a meeting of mixed messages, but in the end enough to provide a sigh of relief for equity markets. The thought of a December rate hike is not going to scare anyone given not so long ago the markets feared four rate hikes in 2016. And the lowering of rate and GDP expectations going forward means Fed tightening will likely be so gradual as to be almost imperceptible.

Might as well buy stocks.

Other markets reacted as would be expected. The US dollar index is down 0.5% to 95.48. Gold is up US$20. The ten-year bond yield is down 2 basis points to 1.67. The VIX volatility index fell 16% as fear subsided. The oil price is up 3%.

We can now spend the next two and bit months getting on with things, and if the world prices in a December hike and doesn’t fret about it, then we should not have to go through this tedious speculative process again this year. But of course, anything could change.

We could have a Trump presidency.

Commodities
As always, the shutters are coming down on the LME just as the Fed statement is being released, and ahead of the press conference. Thus we’ll need to wait until tonight to see just how base metal traders respond.

In the meantime, a mixed session had aluminium and nickel rising 0.7%, copper and zinc falling 0.7%, and lead dropping 2%.

Iron ore rose US10c to US$55.40/t.

West Texas crude has rolled over to the new November delivery contract which has probably played a part in a US$1.57 or 3.6% jump to US$45.62/bbl, otherwise due to the Fed, with November Brent only rising 2.1%.

Gold is up US$20.30 at US$1334.90/oz.

Alas, while the Fed outcome will be positive for the local stock market today, that “complication” is back in the form of a 1% jump for the Aussie to US$0.7632.

Glenn Stevens will be smiling wryly as he polishes his putter – not my problem anymore.

Today

The SPI Overnight closed up 32 points or 0.6%.

On the subject of the RBA, the new governor will today make his first testimony to the House of Reps economic committee.

There’s some data out in the US tonight, but December is a long way off.

Brickworks ((BKW)), Premier Investments ((PMV)) and OrotonGroup ((ORL)) will release earnings results today, there are a few more ex-divs, Scentre Group ((SCG)) will host an investor day and Suncorp ((SUN)) will hold its AGM.

Rudi will travel to Macquarie Park to appear on Sky Business twice today. First from 12.30-2.pm and later between 7-8pm for an interview on Switzer TV.
 

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