Daily Market Reports | Nov 18 2010
By Greg Peel
The Dow fell 15 points or 0.1% while the S&P was flat at 1178 and the Nasdaq rose 0.3%
The Ben Bernank would have been feeling a bit more smug last night, perhaps stealing a quiet moment to thumb his nose at social media websites (click here to understand what I'm talking about).
In justifying QE2, Bernanke has constantly pointed out that Congress has given the Fed a mandate to keep US unemployment low and inflation in a low positive range (1-2%). We know that the unemployment rate is stubbornly stuck just under 10% and last night's monthly CPI data provided plenty of grist for the Fed's mill.
The headline CPI rose 0.2% in October against expectations of a 0.3% rise. The core CPI was flat (0.1% expected). The annualised core CPI is up 0.6% which is not only outside the Fed's 1-2% range, it is the lowest level in recorded history. The usual central bank response to such data is to cut the cash rate, but as the cash rate is zero the only option open is to implicitly cut to a negative rate by diluting the currency base, that is, QE2.
Further QE2 justification was provided by the October housing starts number, which fell 11.7% to an annualised 519,000 – the lowest level since April 2009. Economists had expected a figure of 600,000. The only silver lining was that permits (what we call building approvals) rose 0.5% suggesting maybe the numbers might look better in a couple of months.
In what might be a warning to anachronistic Australian retailers, data released last night showed that US e-commerce retail sales rose 13.7% in the September quarter. The equivalent total retail sales number was 6.0%. E-commerce's market share of total retail is only 4.0%, and the 13.7% growth figure was actually below the June quarter's 14.5%, but double digits are nevertheless now the norm. Australian shoppers can exploit the new spending power of the Aussie by buying online from offshore, thus stealing that margin increase opportunity from local retailers. And they are, in ever growing numbers.
So if there were nothing else going on in the world right now, we might say that the US market is “neutral” given any bad data justify QE2 and perhaps even more QE2 and any good data are, well, just good. But there are other things going on in the world.
The misapprehended fear of a Chinese rate rise appeared to abate last night after Tuesday night's big fall. It astounds me when Wall Street (and us) rushes into buy stocks whenever the Chinese PMI comes out stronger than expected and then rushes just as quickly to sell them as soon as someone says “further tightening”. If Wall Street is neutralised by QE2, so too is China neutralised. Beijing will tighten if the Chinese economy is not slowing at the intended rate and will not tighten if it is, or is slowing faster, or if exogenous (eg Europe) influences suggest slowing might occur anyway.
That's exactly what's been happening all year. It's under control people!
The other problem is, of course, Ireland, and the script has played out exactly as I have suggested being exactly as it always does. As soon as a politician (or a CEO) says “there is no problem” it means there is one as as soon as they say “we don't need help” it means they do.
Last night the finance ministers of the 27 eurozone nations began a meeting and officials from the European Commission, the European Central Bank and the IMF are now on their way to Dublin to discuss stabilisation efforts. Whether or not this means tapping into the EU-IMF emergency fund or not is irrelevant – the fund is there for exactly this purpose. Again, there is a certain level of neutrality about the current European situation.
Which is not to suggest the markets shouldn't have sold off this week and particularly on Tuesday night. As I suggested yesterday a risk trade correction following overblown QE2 exuberance can only be a good thing. Last night on Wall Street was one of consolidation and cooler heads, and the markets traded in a tight range and closed relatively flat as Wall Street awaited the next round of news from either side of the globe or at home. As I speak, the pricing of the General Motors IPO is about to be decided.
Oh it's US$33, if you're interested.
Everything else stabilised last night too. The euro ticked back up a bit on the news of the Dublin meeting and thus the US dollar index slipped slightly to 79.10. The Aussie rose slightly to US$0.9787.
The US bonds are fun at the moment. The ten-year yield started the day up slightly until 11am when the QE2 train rolled in and picked another US$5bn worth, in which case the yield dropped. Once the train was loaded the yield went straight back up again and finished up 4bps at 2.87%.
Gold slipped another US$6.10 to US$1335.30/oz but silver managed to tick up a tad. Base metals were mixed and relatively stable but oil still copped some selling, falling US$1.80 to US$81.04/bbl.
The SPI Overnight fell a point.
So we've reached a plateau for now but the mood seems to suggest we may yet go lower. Each point lower provides a better buying opportunity but there doesn't seem to be any need to rush.
David Jones ((DJS)) will report quarterly sales today.
Oh and the UK has announced a new US$1 billion stimulus package, as CNBC has been cheekily suggesting this morning. Have you ever seen a prime minister look so happy? Do you think the PM might have had a quiet word in a certain rather influential grandmother's ear? If he's going to do it anyway, ma'am, now would be a really good time. Cynics note that other such announcements have coincidentally come in similar times of turmoil.
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