The Overnight Report: Just Buy It

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By Greg Peel

The Dow rose 53 points, or 0.3%, while the S&P gained 0.7% to 1530 (another new 5-year high) and the Nasdaq added 0.7%.

The following is the salient paragraph from the statement issued by the RBA from the February monetary policy meeting, a statement which sent the Aussie lower and heightened money market expectations of a rate cut in March:

“The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand. At today's meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged. The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time.”

This is the salient paragraph from the minutes of that meeting, released yesterday, which sent the Aussie higher and eased expectations of a rate cut in March:

“The inflation outlook, as assessed at this meeting, would afford scope to ease policy further, should that be necessary to support demand. Noting that monetary policy was already accommodative as a result of the substantial easing of policy over the past 15 months, and that this stimulus was continuing to work its way through the economy, the Board judged that it was prudent to leave the cash rate unchanged at this meeting.”

If someone can spot the contrast, please feel free to let me know. Personally, I think the RBA is “on watch” with regards to the Australian economy and will cut as soon as it appears necessary. As to whether that will be in March, April or beyond will depend on the data in between. Meanwhile, the Aussie is up 0.5% to US$1.0354 based on the minutes, having fallen by about the same amount when the statement was released on the fifth.  That session saw the Aussie down a net 0.3% to US$1.04399. Go figure.

On to Wall Street. I have suggested in earlier reports that the US housing market recovery has hit an unsurprising pause, based on two factors. Firstly, the recovery to date has encouraged sellers to back off their prices and tempt buyers to pay up, rather than desperately slapping any offer that comes along as was the case post-GFC. Sales growth has thus declined from its earlier pace as more “normal” price haggling has returned. Secondly, US banks have flipped from being ultra-loose pre-GFC to ultra-tight when it comes to mortgage approvals. In 2006 if you wanted a mortgage, all you needed was a pulse. In the years since, if you want a mortgage you must jump through several flaming hoops and provide a library of documentation with respect to income, debts etc.

Banks have always, throughout history, lent too much at the top of the market and not enough at the bottom. They are always part of the problem and never part of the solution. The higher US house prices rise, the more difficult it is for prospective buyers to secure mortgages. Until the banks begin to ease up a little, the US housing recovery will find it difficult to move to the next stage.

Last night the NAHB US housing market sentiment index fell for the first time in ten months, to 46 from 47 in January. Homebuilder stocks fell as a result.

On the positive side, M&A talk is all the rage on Wall Street. Recently we’ve seen two major US airlines looking to merge, and Warren Buffet looking to takeover Heinz, and last night Office Depot and OfficeMax announced merger intentions. Wall Street likes M&A.

The net result was another positive session for Wall Street, which saw the Dow push back above 14k. Adding additional impetus was the latest monthly ZEW investor sentiment survey out of Germany, which saw the index jump to its highest level since April 2010. The jump surprised analysts in its scale given it beat even the highest marker of the range of estimates surveyed by Reuters, and surprised generally given it comes on the back of last week’s very sour eurozone GDP release (which included contraction in Germany) and talk from the ECB that the strong euro is putting the zone’s economic recovery at risk.

Meanwhile on the Pacific Front, Japan’s finance minister came out yesterday to deny the suggestion made the day before by the prime minister that the government might buy foreign bonds as part of the concerted monetary easing policy. Not on the agenda, he said. The denial has exposed somewhat of a rift between the two, which apparently extends to preferred choice for the incoming BoJ governor.

The yen rebounded as a result of the denial, while the euro rose on the ZEW result. The US dollar index fell 0.2% to 80.45. Gold continues to struggle, falling US$5.00 to US$1604.80/oz.

The Chinese are back, but they’re not ready to buy base metals, with prices again falling in London last night by 0.5-2.5% (US prices look worse as they are catching up a day). The dip in the US housing index was felt on the LME. The same can’t be said for spot iron ore, which is up US80c to US$158.00/t.

If the LME was focused on US housing, the Nymex was apparently focused on the positive German index. Brent rose US28c to US$117.33/bbl and West Texas rose 80c to US$96.66/bbl.

It’s onward ever upward for the local market it would seem, with the SPI Overnight up 16 points, or 0.3%.

BHP Billiton ((BHP)) reports today, as does Fortescue ((FMG)), Woodside ((WPL)), Suncorp ((SUN)) and Toll ((TOL)) in another crowded results session.
 

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