The Overnight Report: A World Of Confusion

This story features NATIONAL AUSTRALIA BANK LIMITED. For more info SHARE ANALYSIS: NAB

By Greg Peel

The Dow closed up 5 points while the S&P was flat at 1185 and the Nasdaq added 0.3%.

Exactly what shape is the US economy in? Recent assumptions have suggested the world's largest economy will not double-dip but will simply bump along a very slow and rocky growth path for the time being. This opinion is shared by the Fed. And last night provided evidence it is an opinion proving to be fairly accurate.

On the economic data front, the Case-Shiller 20-city house price index showed a fall of 0.2% in August. It was a disappointing result being the first drop after four consecutive months of gains which had encouraged the compilers into believing perhaps a bottom had been seen. The annual growth rate remains positive at 1.7%, but that's down from 3.2% in July.

The FHFA house price index, which looks only at prices of homes with Fannie/Freddie sponsored mortgages, rose 0.4% in contrast. However, the small rise in August followed two months of more substantial declines and from July to August the annual rate rose only from minus 3.4% to minus 2.4%.

The weak data, combined with the fact the US thirty-year mortgage rate is at its lows once again since the Fed stopped buying new mortgage securities, has heightened long-term speculation that once the mid-term elections are over the Obama Administration will announce another round of home buyer tax credits. The Fed has made it perfectly clear it does not intend to do the heavy lifting alone and expects a fresh fiscal stimulus package to be put in place alongside QE2. If at first you don't succeed, try, try again.

But just when all looked dour, and the Dow was down 70 points, along came a jump in the monthly Conference Board consumer confidence survey to 50.2 from 48.6 the month before. Economists had expected 50.0. This number, along with a couple of positive earnings results from consumer discretionary retailers, helped push the Dow back to the flatline where it stayed the rest of the session.

It is not, however, a 50-neutral index. The CB set a base of 100 when it began its surveys in 1985 and all subsequent measurements are thus comparative. A healthily confident market typically means readings over 90. There's yet a long way to go.

On the earnings report front, Ford (Dow) posted a strong result to match the other consumer discretionary reports while DuPont (Dow) disappointed. Further disappointment came from a trio of steelmakers, including US Steel (Dow), which missed expectations significantly. A combination of falling demand and rising iron ore prices was blamed.

So take last night as a snapshot and it's a pretty good summary of where the US economy currently is at – neither hot nor cold, just tepid. Is there enough evidence here to suggest QE2 and fiscal measures are absolutely necessary? Well it still comes down to an unemployment rate stuck at around 10% and continuously rising mortgage foreclosure levels. If these are not addressed, deflation is likely to set in.

The UK has also been arguing over whether or not another round of QE is needed across the pond, but last night's first estimate of UK third quarter GDP may have put British QE2 to bed. While down from a second quarter growth level of 1.2%, the third quarter estimate of 0.8% was much stronger than the 0.4% expected by economists. Year on year growth measured 2.4% which was the strongest result since the third quarter 2007, and all in the face of strict austerity measures.

Standard & Poor's took the opportunity to reconfirm the UK's AAA rating and return its outlook to “stable” from “negative”. The end result was a pound which leapt 1% overnight, yet the US dollar proved a worthy adversary and rose 0.5% on its index to 77.67.

Had the pound not been so strong the Dixie (as the dollar index is known given its exchange code of DXY) would have been even stronger. But given the mixed tenor of last night's US releases, why so strong?

One can only put dollar strength down to its oversold position, and the assumption that all markets have “baked in” a decent lump of QE2 and a Republican win in the House, if not the Senate. In other words, how much farther can the dollar be pushed when the shorts are starting to get tetchy? And the same is true of the US bond market, in which the ten-year yield jumped 8 basis points to 2.65% last night, which is a long way up from the 2.38% reached recently when QE2 speculation was at its most fervent.

By contrast, last night's auction of US$35bn of two-year Treasury notes settled at 0.4% on consistent demand for yet another record low. Foreign central banks bought 40%, up from a 36% running average. This result reflects the knowledge that QE2 will involve the Fed buying Treasuries in the two-ten range, but the ongoing upward drift of the ten-year yield implies a bit of longer term inflation concern (as well as the extent of long positions).

The Aussie pulled back 0.6% of a cent to US$0.9849 last night, ahead of today's all important third quarter CPI release which may or may not spoil Cup Day. Gold was little moved at US$1339.90/oz.

Oil was also little moved at US$82.55/bbl and base metals were mixed on small moves, albeit zinc jumped 2% to reflect a drop in LME inventories.

The SPI Overnight lost 4 points.

As noted, Australia's Q3 CPI is out today along with National Bank's ((NAB)) full-year result. Will the bank post a rather large looking bottom line profit number and then announce a mortgage rate rise next week, sending Comrade Joe into apoplexy?

In the US tonight it's new home sales and durable goods orders and earnings report highlights include ConocoPhillips, Proctor & Gamble (Dow), Whirlpool, Volkswagen and Brazilian iron ore giant Vale.

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