Daily Market Reports | Sep 16 2009
By Greg Peel
The Dow closed up 56 points or 0.6% while the S&P lagged with a 0.3% rise to 1052 and the Nasdaq gained 0.5%.
Last night US Federal Reserve Chairman Ben Bernanke suggested the US recession is “very likely” over. You could have knocked Wall Street down with a feather. Analysts have been calling the recession over for months and the stock market – the leading indicator of economic performance – is up 50% from its lows but when Uncle Ben speaks, the world listens.
Wall Street posted its characteristically weak start last night by falling 46 points on the opening bell. Many recent sessions have begun this way, implying somewhat of a “surely we can’t go higher again” attitude from traders, but every dip, no matter how minor, brings out the buyers. It helps if there are positive economic releases or other good news to support the buying, but really it makes little difference. There’s been plenty of mixed news recently, but still the stock indices post fresh 2009 highs. Until everyone who’s missed out by waiting for the pull-back that never comes is back in the market, only then will it be time to reassess.
But there was good news last night, beyond Uncle Ben’s scoop.
US retail sales rose 2.7% in August – the biggest jump since January 2006 and much greater than the 1.9% expected by economists. The bad news, in a sense, was that the surge was driven by the peak of the “cash for clunkers” program in the month, sending auto sales up a multi-year record of 10.6%. The good news, however, was if you take autos out of the mix, retail sales rose 1.1% which is still much better than the 0.4% economists were forecasting.
And if you go one step further and remove gasoline sales, given the oil price was running hard in August, you still end up with a 0.6% increase. That figure fell 0.4% in July.
As is often noted, the US economy is all about the consumer. Has the consumer now shifted out of a “save against disaster” mode and back into a “spend because everything’s rosy” mode? If Bernanke says the recession’s over, then why not? The Fed is madly trying to encourage private sector borrowing anyway, backed by public sector borrowing.
And the Fed is happy to keep interest rates at historical lows for the foreseeable future, given the ongoing deflationary effect of credit unwinding, low capacity utilisation and high unemployment. But deflationary effects seemed absent last night as the August producer price index was released. The PPI showed a jump of 1.7%, following a fall of 0.9% in July. Again, gasoline was seen as the culprit. But the core PPI (ex food and energy) still rose 0.2%, following a 0.1% fall in July.
On the release of this figure, the US dollar understandably rose. If disinflation is now turning around into inflation as the economy shows signs of recovery (as one might normally expect) then pressure mounts on the Fed to rethink its historically low interest rate policy.
Business inventories, however, are still playing more into the Fed’s expectations. Monthly inventories fell 1.0%, but given they take longer to count this was a July figure, not an August figure. It was also close to economist expectations.
Falling inventories are not indicative of a recovery that has picked up steam. Merchants were still winding down the inventory overhang in July, although sales did rise 0.1%, but this is not enough to assume much inflationary pressure. Wall Street is, nevertheless, placing great stake in businesses paring back inventories to very lean levels – setting to run “just in time” order-filling systems – to thus provide a solid base for the eventual Great Inventory Rebuild which will drive US economic growth.
To that end, the New York (Empire) State manufacturing activity index was released last night with a monthly reading of 18.9. This is not a 50-neutral index. August’s reading was a mere 12.1 and September’s reading represents the highest level since the beginning of the recession in 2007.
It’s all a mixed bag, but the net of last night’s data was clearly to the positive side, assuming inflation is kept at bay.
The rise in the US dollar on the PPI data was short-lived nevertheless, given Wall Street took Bernanke’s declaration as enough to suggest it’s time to get into the stock market now if you haven’t already done so. The flipside of that is to sell the “safe haven” US dollar, and thus the dollar index actually finished the session lower, at a new 52-week low of 76.51.
A lower US dollar provides impetus for the gold price, and a lower dollar combined with a higher inflation reading is almost unheard of. But gold is also a safe haven, and as the stock market continues to rise there are plenty of sellers swapping out of gold and back into risk assets. Thus we have a typical push-pull on the gold price. The push won last night as gold once again grafted into four-digit territory, rising US$7.90 to US$1007.30/oz. Silver continues to go berserk, encapsulating both its precious metal status and industrial metal popularity into yet another big rise of 2.9%.
London base metals were also stronger last night, driven more by the positive US economic data than the US dollar given the dollar was not weak by London’s close.
All metals rose around 1.5% to 2.5% with the exception of lead, which is still recovering from its big fall last week and thus added 5%. Traders nevertheless noted the buying was not frantic, and possibly with good reason. Data this week have shown Chinese imports of all copper products fell 20% from July to August.
Aside from a bit of weakness last week, London metal prices have been climbing ever higher since the great Chinese hoover as the US dollar slides. Higher prices spark mandatory commodity fund buying, which in turn forces higher prices. Actual consumer demand has been absent for some time, and traders fear that a combination of a winding down of Chinese stockpiling and a ramping up of previously idle Chinese smelters will lead to a big hole in the demand-supply equation. On the flipside of that, however, is improving economic activity elsewhere across the globe, encouraging “real” consumer buying to re-enter the market.
Encouraging economic signs remain a driver for the oil price, which last night leapt US$2.07 or 3% to US$70.93/bbl. Uncle Ben was, again, credited with the hike. If he doesn’t want inflationary pressures to build up maybe he should just keep his trap shut.
On all of the above, the Aussie ticked higher to US$0.8637, while the SPI Overnight added 21 points or 0.5%.
The ASX 200 is struggling to push higher at present, finding selling popular later in the session following early session gains. This may not be at all surprising given the effects of the FTSE Asia-Pacific index adjustment which is currently underway. For more on that story, refer back to Selling Wave To Hit Australia In September.
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