Daily Market Reports | Nov 05 2009
By Greg Peel
The Dow closed up 30 points or 0.3% while the S&P managed only 0.1% to 1046 and the Nasdaq fell 0.1%.
Lost in the wash in Australia yesterday, as economists debated the implication of a weak retail sales number for December RBA monetary policy, was the AiG performance of services sector index which showed an increase from 49.3 in September to 54.8 in October. The services sector is effectively the non-manufacturing sector and features all non-widget businesses from banking to hairdressing. The rise to over 50 implies the services sector has now returned to expansion, thus joining the manufacturing sector.
Performance of services numbers were also released in Europe, the UK and the US last night. The EU saw a rise from 51.1 to 53.0 and the UK from 55.3 to 56.9, but early on Wall Street it was announced the ISM PSI had fallen from 50.9 to 50.6.
The US number is hardly anything to panic about, and it’s still (just) in expansion territory. The new orders sub-index rose from 54.2 to 55.2, which was heartening. Hot on the heels of the PSI was the October ADP private sector employment number, seen as a precursor to Friday’s official employment numbers. According to ADP the private sector lost 203,000 jobs in October compared to 227,000 lost in September and roughly in line with the 198,000 expectation.
This was taken as an okay result given the pace of job losses continues to slow, although in order to cause the unemployment rate to drop the private sector needs to add 100,000 jobs in a month.
The two economic releases were joined by a well-received earnings result from Dow component Merck, which saw its shares jump 6%, and by the announcement that Dow component Disney had won approval to build a theme park in Shanghai. It truly is a small world after all. It’s also why the Dow performed a bit better than the other indices last night.
All of the above was sufficient cause for Wall Street to rally in the morning, aided by a weaker US dollar which was fighting against the solid European and UK PSI results and speculation that the Fed would not raise rates, nor even talk about raising rates, come its 2.15pm statement. At 2pm the Dow was up about 115 points.
On the release of the statement, two words immediately leapt out at first-glance traders – “exceptional” and “extended”. These are the two crucial words in the Fed’s current and ongoing monetary policy, being “exceptionally low rates will remain in place for an extended period”. There had been a lot of chatter about the Fed needing to raise rates as the economy recovered and in the face of a falling dollar, and Wall Street had even pointed to Australia as a clue.
But whereas the RBA has shown concern over too-low rates fuelling asset price bubbles, particularly in housing, the Fed has always shown that it couldn’t care less. It was this attitude from former chairman Greenspan that helped us into the GFC mess in the first place. Not that the US housing market is in any sort of bubble just yet, but the stock market?
Those on Wall Street expecting some moderation of the Fed’s easy stance – at least through the rhetoric if not by an actual rate rise – were disappointed. They have looked to inflation potential as cause enough to tighten, and so on that basis the FOMC was at pains to point out why inflation was no threat whatsoever.
Despite noting that household spending “appears to be expanding”, rather than “stabilizing” as was the case in September, this was qualified with “but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit”. Economic activity is “likely to remain weak for some time”, and “With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time”.
The Fed really hammered the point home this time. And that implies no change to policy – not for an extended period. As to what an “extended period” actually means, most suggest at least six months.
On this news, the dollar dropped and the Dow shot up to be 140 points higher. But then the first-glance traders read on further.
What they found is the Fed now only intends to purchase “about US$175bn” of agency (Fannie & Freddie) debt, instead of the previous maximum of US$200bn, given reduced availability. Omigod, said Wall Street, they’re pulling back on quantitative easing. The Dow duly plunged 90 points.
But wait. The US$200bn figure was only ever a “maximum” and not a target. And “limited availability” simply implies there’s not enough agency debt around now following earlier purchases, and the Fed does not want to upset liquidity. Oh thank God, the Dow then rallied back 110 points to be up nearly 160 points.
But then we passed 3pm. And what happens after 3pm when the overall mood is bearish? The sellers come in. So we finished up only 30 points, and dizzy.
The feature of the session was nevertheless a US dollar index which ultimately fell 0.9% to 75.70, again shaking off thoughts of a dollar bounce, due to no change in heart from the Fed. On that basis, gold jumped another US$10.10 to US$1094.80/oz. Eleven hundred here we come.
The bond market played an interesting game. Yields fell in the two-years as no interest rate rise is expected but rose in the ten-years given inflation will be fuelled over time. The yield curve thus steepened, which is what the Fed atually wants because it’s good for banks.
Oil jumped US80c to US$80.40/bbl and guess what? Analysts had expected gasoline inventories to rise this week but they fell.
The LME shut ahead of the Fed announcement, but all metals bar nickel were modestly higher on earlier dollar weakness. The Aussie shot up a cent to US$0.9124.
The SPI Overnight closed up 23 points or 0.5% – an ambitious looking figure compared to the S&P 500’s 0.1% gain and given the apparent prevailing inability of the ASX 200 to rally with any conviction.
After the bell, News Corp reported an earnings per share result of US22c versus US20c expected, with revenue of US$7.20bn versus US$7.16bn. Cisco Systems – a Dow component and bellwether for the tech sector – reported US36c versus US31c and US$9.0bn versus US$8.7bn. News shares are up 1% in the after-market and Cisco shares are up 3%.
Watch out today for a speech from Glenn Stevens to throw more grist to the December interest rate mill.
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