Daily Market Reports | Sep 03 2012
By Greg Peel
“It seems clear, based on this experience, that [non-traditional] policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.
“As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.
“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Taking into account that Wall Street had already long ago adjusted to expectations of further monetary policy action from global central banks, including the PBoC, the ECB and the Fed, this conclusion to Ben Bernanke's speech at Jackson Hole was worth 90 points in the Dow, or 0.7%, 0.5% in the S&P to 1406 and 0.6% in the Nasdaq.
The two phrases to highlight here are that US unemployment is “a grave concern” and that the Fed “will provide” additional stimulus as needed. The former suggests that while recent US economic data have appeared slightly stronger rather than weaker, jobs growth remains stagnated and that's the real issue. The second is largely yet another reiteration of the ongoing “if needed” mantra, however “will provide” is a definitive step-up from earlier “can provide” statements.
As per usual, Wall Street could not immediately figure out what response was appropriate and thus Friday saw a volatile session. Is this new, or not? Does this mean QE3, or not? In the end, however, the Dow had jumped around 100 points initially and settled roughly at the same level. That level is still a couple of hundred points below the high made in August, which matched the four-year high of May. So we have not broken the range yet.
Clearly there will be an even greater than usual emphasis placed on the next non-farm payrolls report, due on Friday. If this speech has swung expectation back towards a QE3 announcement (or at least some fresh form of “non-traditional” policy) at the September FOMC meeting next week, after expectations had soured last week, then a weak jobs report on Friday would likely seal the deal in the minds of traders. A good report will probably confuse. And let us not forget the ECB will meet on Thursday and that the German court ruling is due the day before the FOMC meeting next week.
Perhaps most notable in Bernanke' speech, beyond attempts to predict his policy preference, was his open-hearted plea of mortality. In not so many words, Bernanke insisted that he is not God, nor a superhero, but a mere mortal who wrote papers as a young buck on the unlimited power of the US printing press without ever necessarily believing such a situation would arise. Now that it has, his efforts since 2008 have been a case of boldly going where no man has gone before and as to where that might lead, Bernanke really doesn't know. He fears the unintended consequences of unfettered policy easing but as the first paragraph taken from Bernanke' speech above suggests, he believes the risks are justified. If anything, Bernanke was saying “we're all on this journey together”. Perhaps he was also getting his excuses in before applying further non-traditional policy.
The response from the US stock market may have been uncertain, but not so for gold. As the US dollar index slid 0.6% to 81.25, gold jumped US$36.10 to US$1691.60/oz and took out a couple of resistance levels on the way. Bernanke's speech was not emphatic, suggesting gold traders may have gone into the Jackson Hole meeting a little short.
US bonds were back in favour on Friday night, given the possibility of a pure form of QE3 that implies the Fed buying bonds. The ten-year yield fell 6 basis points to 1.56%.
Oil also jumped on Friday on the weaker US dollar, with Brent gaining US$2.21 to US$114.86/bbl and West Texas rising US$1.01 to US$95.63/bbl. Base metal markets were more muted, rising only slightly. Perhaps LME traders were reluctant to load up ahead of Saturday's release of China's official manufacturing PMI for August. It was a good call.
China's PMI was expected to fall to 50.0 from 50.1 in July but dropped to 49.2, representing the first contraction since last November. It is another psychological blow to global perceptions about the Chinese economy, coming on top of last week's collapse in sport iron ore prices. The world has been impatiently awaiting a monetary policy response from Beijing but it never seems to come. With property prices in China continuing to rise, Beijing is stuck between the proverbial rock and hard place.
Perhaps Beijing is waiting to see what the central banks in Europe and the US are going to do before making its own policy decision.
The SPI Overnight closed up 24 points or 0.5% on Saturday morning, ahead of the Chinese PMI release. The SPI may not be quite as strong this morning. The Aussie rose 0.3% on Friday night to US$1.0325, but is coming under pressure this morning.
China will release its official service sector PMI today, while HSBC will provide its independent take on China's manufacturing PMI and follow up on Wednesday with its measure of the services PMI. This weekend will also see China's monthly data dump for August.
The corporate reporting season has come to an end in Australia, but attention now turns to the economy with a huge raft of data due out this week. The highlight will be the June quarter GDP result on Wednesday. Consensus is for a 0.8% growth, down from 1.3% in March, to provide 3.7% annual growth, down from 4.3%.
Ahead of that release there's plenty more to digest. Today will see Australia's manufacturing PMI, along with those of the UK and eurozone tonight. Today also brings June quarter company profits and inventories, July retail sales, and the ANZ job ads series and TD Securities inflation gauge for August.
Tomorrow it's the June quarter current account and net exports, along with the RP Data-Rismark monthly house price index. The RBA will make a rate decision tomorrow and consensus is firmly for no change. What will be interesting, nevertheless, is what the board's statement will have to say with regards the more apparent slowdown in China and weakness in commodity prices.
Wednesday is the GDP release, along with the service sector PMI. Thursday it's the jobs numbers and Friday sees the trade balance and construction PMI.
It's the Labor Day holiday in the US tonight, thus shifting regular economic releases back a day. The US manufacturing PMI is out tomorrow night along with construction spending, while Wednesday sees productivity and vehicle sales. Thursday its the services PMI and the ADP private sector unemployment report ahead of Friday's official non-farm payrolls number, which will be of great interest to Ben Bernanke.
The ECB meeting the world has been waiting for is on Thursday night, but Spain is still pre-negotiating the terms of a bail-out it hasn't yet requested and little can be promised ahead of the German court ruling next week. Thus one presumes Mario Draghi can only disappoint on detail while probably remaining positive on rhetoric. The Bank of England will also meet on Thursday.
Goodman Fielder ((GFF)) will hold an investor day today to inform as to what side its bread is buttered, while this week will see quite a number of stocks going ex-dividend, which always applies an apparent dampener on the stock indices.
Rudi will appear on Sky Business on Thursday at noon and again at 7:00-8:00 for the Switzer program.
For further global economic release dates and local company events please refer to the FNArena Calendar.
