The Monday Report

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By Greg Peel

It was an unusual session on Wall Street on Friday night given the Dow fell 31 points or 0.3% while the S&P rose 0.2% to 1176 and the Nasdaq soared 1.4%. It was a tale of two earnings reports. A strong result from Google sent its shares up 11% while a revenue miss from General Electric (Dow) saw its shares fall 5%. Ongoing concerns over mortgage foreclosures and fraud claims had the banks down yet again, impacting on both the Dow and S&P.

The highlight of the session was, perhaps, that for one brief moment the Aussie dollar traded above US$1.00 when the greenback opened weaker. But if you blinked you would have missed it, and the Aussie quickly retreated to be just above US$0.99 again by the close. Driving the retreat was a rebound in the US dollar.

The US dollar closed up 0.6% to 76.96 in the session as doubts began to creep in over QE2. The doubts are not about “if” but about “how much” given the significant level of QE2 already priced into the market.

In a speech on Friday, US Fed chairman Ben Bernanke said, “There would appear – all else being equal – to be a case for further action”. This provided confirmation the Fed was indeed planning some further quantitative easing but when Bernanke suggested officials “will take account of the potential costs and risks”, and that any action would be “contingent on incoming information about the economic outlook and financial conditions,” Wall Street began to wonder whether assumptions of a US$500bn package might be just a little too presumptuous. The “costs and risks” part seemed to be a nod to those officials within the Fed ranks – both in and out of the FOMC – who have voiced their doubts and fears with regard to QE2. Perhaps consensus is still proving difficult.

The US bond market also responded to Bernanke's comments, with the ten-year yield rising 6 basis points to 2.56%.

With regard to the “incoming information” upon which QE2 will be dependent, the release of the September CPI on Friday showed a headline increase of only 0.1% and a core change of zero. Core CPI is up just 0.8% annualised and is quietly slowing. Bernanke has singled out inflation as his target and has noted the Fed is mandated to keep core inflation running at 1.5-2.0%. This release alone is enough to suggest at least some level of QE2 is a given.

In other releases on Friday, the Michigan Uni consumer confidence level slipped in the first October survey while manufacturing activity in New York State was better than expected in September. August business inventories rose more than expected but sales did not grow to match.

The stronger US dollar sent gold down US$11.70 to US$1368.90/oz while oil fell US$1.44 to US$81.25/bbl and base metals saw 1-2% drops. Copper was nevertheless resilient, rising slightly.

The SPI Overnight lost 16 points or 0.3%.

Bernanke's comments are likely to reinforce the notion, between now and the November FOMC meeting, that bad news is good news and vice versa. Positive economic data releases will be seen as a possible dilution to QE2.

This week begins with US industrial production tonight along with the housing market sentiment index and Treasury long-term capital flows. Tuesday it's housing starts and building permits and Wednesday sees the Fed's monthly Beige Book which will provide evidence of how each of the Fed regions' economies is performing. On Thursday the Conference Board releases its leading economic index and the Philadelphia Fed its manufacturing index.

In Australia the general populace will continue to barrack for the Aussie Battler to conquer parity but exporters will be happy if QE2 doubts can send it back the other way. On Monday it's vehicle sales and on Tuesday the RBA will release the minutes of its October meeting. Economists will be looking closely for clues that Melbourne Cup day will see a rate rise. Maybe that might be the parity call.

Wednesday brings merchandise imports, Thursday housing affordability in the third quarter and Friday the import and export price indices.

Thursday sees the monthly round of Chinese data, including CPI, PPI, retail sales and industrial production. Thursday also brings the release of China's September quarter GDP. As is the case with US data, Chinese data have become a two-edged sword in that a better than expected result would bring expectations of further policy tightening from Beijing.

While Australia might be worried about its overly strong currency, the same is true in Europe where the euro is back to pre-crisis levels given the weakness of the greenback. Next week sees the two important ZEW and Ifo business surveys in Europe which have the power to move the markets.

On the stock front, Bank of America (Dow) and Goldman Sachs will report their third quarter earnings in the US on Tuesday along with Coca-Cola (Dow), Johnson & Johnson (Dow) and Yahoo. Wednesday it's Morgan Stanley, Wells Fargo, Boeing (Dow), United Technologies (Dow) and eBay.

Thursday brings Amazon, American Express (Dow), AT&T (Dow), Caterpillar (Dow), Credit Suisse, McDonald's (Dow), Travelers (Dow) and UPS, while Friday sees Verizon (Dow) to round out some of the highlights for the week.

On the local stock front, momentum continues to build in the AGM season while the Ten Network ((TEN)) reports its full-year result on Thursday. There will also be quarterly production reports from OZ Minerals ((OZL)), BHP Billiton ((BHP)), Newcrest ((NCM)), Santos ((STO)), Iluka ((ILU)) and Woodside ((WPL)) across the week.

Foster's ((FGL)) will update on its beer business on Thursday and wine business on Friday.

For further global economic release dates and local company events please refer to the FNArena Calendar.

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