Daily Market Reports | Dec 17 2009
By Greg Peel
The Dow closed down 10 points or 0.1% while the S&P rose 0.1% to 1109 and the Nasdaq added 0.3%.
Fed chairman Ben Bernanke is no fool, and nor is he a man lacking in the courage of his convictions. So far his track record in the role has been one of a solid innings after a wobbly start. Currently he is hailed domestically as a hero, and recognition is given to his sound understanding of what his predecessors did wrong in the early 1930s to bring about the Great Depression. Only history will tell us whether this time the Fed has got it right.
One of the Fed’s biggest mistakes in the 1930s was to re-raise interest rates too quickly after the ’29 crash. That is why today’s Fed is intent on maintaining “exceptionally low interest rates for an extended period” and providing a wealth of quantitative easing programs, from mortgage security support to troubled asset relief. In recent weeks, however, speculation has been building that the Fed would have to start exiting its programs sooner rather than later and ultimately raising the cash rate. US economic data is apparently on the improve. One might suggest speculation began to simmer when the RBA began raising in October.
Two recent data releases have particularly fuelled US rate rise speculation, being last week’s unemployment surprise and Tuesday’s higher than expected PPI. The US dollar index is up over 3% from its earlier lows. Last night saw volatile trade in the US dollar ahead of the release of the Fed’s December monetary policy statement at 2.15pm.
The early session on Wall Street saw various data releases. After a strong producer price index, the consumer price index came in on expectation with a 0.4% gain. Those expecting the CPI to also be higher than expected were caught out. The core CPI rose only 0.2% against expectation of 0.1%, with the difference being higher oil prices. As we know, oil prices have since reversed.
Tuesday’s inflation scare was thus unfounded. The dollar was sold off once more. Then came the third quarter current account result.
US fiscal and monetary stimulus is all about trying to get Americans to spend their way out of the GFC, and it’s working. The US current account deficit widened to 3.0% of GDP in the third quarter from 2.8% in the second quarter. While still well down from its peak of 6.5% in 2005, clearly the current account deficit is not sufficiently benefiting from a lower US dollar boosting US exports. The weaker greenback has not stopped Americans spending on imports. To reduce the deficit Americans need to stop spending and start saving. But hang on…
See the problem? What Americans really need to do is buy American, and nothing else. No Japanese cars, no Chinese televisions. Otherwise the battle to reduce the twin deficits will be a generational one. However, by shutting up shop to the world the world as a whole would suffer, given Americans are the greatest consumers on earth. The export markets of Europe and Asia depend on the US, and thus does Australia, indirectly, unless Chinese domestic consumption can well surpass China’s reliance on exports.
It’s a tangled web.
Dollar weakness was further assisted by the current account result, but then the November housing starts number came in at a better than expected 8.9% rise. This was a sharp reversal from the 10.1% fall in October, but in October Americans assumed the first homebuyer grants would expire in November. Those grants have since been extended, and widened, and hence the bounce. The two months’ results should thus be considered on a net basis.
But the November number was enough to halt the dollar’s slide, and the index began creeping up again ahead of the Fed announcement.
The stock market over this period had opened higher on the weaker dollar – over 50 points in the Dow – then it wobbled as the dollar turned before drifting lower as the dollar rebounded. Text book 2009.
The Fed statement contained very little change in general commentary. The US economy had “continued to pick up” since the last meeting, but slack in capacity utilisation would ensure “inflation will remain subdued”. The only real change was the Fed’s nod to the better than expected unemployment result last week, suggesting “deterioration in the labour market is easing”. Otherwise the cash rate was left in its zero to 0.25% range, and for the umpteenth time the Fed reiterated that rates would remain “exceptionally low for an extended period”.
But coming back to my “Bernanke is no fool” statement in the opening paragraph, clearly the chairman thought it was time to put an end to unwarranted speculation. So one by one the statement outlined each of the emergency liquidity facilities, of which there are about half a dozen, and said the Fed anticipated they would expire on February 1 as originally planned. Mortgage-backed securities purchases would end on March 31 as most recently suggested, and the asset-backed loan facility on June 30, as most recently suggested. In other words, nothing has changed.
We could take this one of two ways. You could say that because the dates weren’t brought forward, the dollar should be sold again. Or you could say because the dates weren’t extended, the dollar should be bought. The initial response was the latter, and the index spiked to 77.00. The subsequent response was the former, and thus the index drifted back again to end up almost where it was this time yesterday, at 76.90. Hence the stock markets closed little changed.
There has thus been little reason for markets to worry about rate rises, just yet. But CNBC’s resident economist Steve Liesman summed it up rather nicely by interpreting the Fed statement as “Attention shoppers, the Fed store will be closing in 15 minutes”. In other words, don’t say we didn’t keep you up to speed.
Having fallen quite a way from its peak, gold rallied last night as the dollar weakened and mostly held its ground after 2.15pm. Gold is net up US$11.40 to US$1133.80/oz over 24 hours. The Aussie dollar, on the other hand, was driven over 24 hours by the weaker than expected Australian third quarter GDP, such that it is 0.6 of a cent lower at US$0.9003.
Oil was also influenced beyond its simple dollar relationship. Crude jumped US$1.97 to US$72.66/bbl following a bigger drawdown on weekly inventories than had been expected.
The final “kerbside” session of LME trading ends at 2pm New York time, so London base metals responded only to dollar weakness ahead of the Fed. Commodity funds dived back in after having been spooked these last few days, seeing aluminium rise 1.5%, copper and lead 2%, nickel 3% and zinc 4%. Be warned that, ceteris paribus, these moves should temper tonight.
The SPI Overnight rose 5 points or 0.1%.
Note: Australian stock and futures options expire today. Brokers are lamenting, just quietly, that today will thus be “the end of the year”. Nothing much is expected of the market thereafter until January.
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