Daily Market Reports | Jun 26 2008
By Greg Peel
The Dow closed up a mere 4 points while the S&P rose 0.6% and the Nasdaq 1.4%.
The market started a little bit stronger but quiet ahead of the Fed decision at 2.15pm. This came in as unchanged, as expected. This is the first time the Fed has left the rate alone since it first responded to the credit crunch in September.
This is what the Fed said (my emphasis):
“Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.
“The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.
“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”
The Fed has made a nod to stimulus cheques in the first paragraph, and reiterated its expectation that inflation should moderate (largely meaning oil prices will contract) in the second. However, the message is all in the third paragraph. To appreciate the change of tone, one need only revisit the equivalent paragraph from the last statement on April 30, when the Fed cut by 25 basis points:
“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.”
At the last meeting the Fed was hoping its policy of reducing the cash rate from 5.25% to 2% would “mitigate risks to economic activity”. At this meeting the committee has decided the risks have now “diminished”. Last meeting the Fed had also suggested inflation would moderate in coming quarters, but this time the “upside risk to inflation and inflation expectations have increased”.
So there you have it – no more rate cuts, the economy is hanging in there. But inflation is a problem that may need to be nipped in the bud. So the next rate move will be up and not down. However, it won’t necessarily happen at the next meeting, for the Fed is still hoping for relief in coming quarters. The Fed is On Hold.
The stock market reaction was an initial burst of strength that had the Dow up 117 on the day, but then a fade-out towards the close. The fade-out was a little disappointing, and came about largely because the US dollar actually slipped back on the day. Given the more hawkish bias of the Fed statement, traders initially expected the US dollar to rally and to push down commodity prices.
The disparity between the 30-stock Dow’s final performance and that of the broad market S&P 500 was largely due to a Goldman Sachs downgrade on Boeing to Sell. Given the parlous state of the airline industry, Goldman decided the aircraft manufacturers would also suffer. However, in a reverse of trend last night advancers outnumbered decliners by 2 to 1 across the NYSE.
The fade in the US dollar was attributed to the fact that while the Fed statement was indeed hawkish, it did not signal action any time soon. There remains the risk that the ECB will not be so considerate, and plough ahead with its own rate rise. This would send the greenback lower once more.
The economic news for the day was that durable goods orders were unchanged in May, which is more good news than bad, but that sales of new homes fell 2.5% in May to be down 40% over 12-months. The usual multi-decade lows were again quoted.
While observers have been looking for signs of a bottoming in the housing slump, the latest problem is the high oil price. New homes tend to be built further and further away from city centres and established transport infrastructure, so the cost of driving to work now plays heavily on buying decisions. (A problem Sydney knows all too well).
Over at the Nymex things were initially looking positive as well (as long as you see lower oil as positive) which is why the stock markets were up early on. The weekly crude inventory report showed a rise, which seemed to surprise everyone other than Saudi Arabia. Oil fell US$5 on the news, but the fading US dollar crimped the fall and the final result was only down $2.45 to US$134.55/bbl. But it is looking toppy!
The story was similar in the gold market, as traders followed oil down and the precious metal lost around US$15 ahead of the rate decision. But once again a weaker greenback stopped the rot, and the final result was down US$3.40 to US$885.50/oz. The Aussie put on an almost half cent jump to US$0.9596.
Base metal markets were mixed and uneventful.
The SPI Overnight was up one whole point.
