The Overnight Report: Bernanke Says The Same Thing, Again

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By Greg Peel

The Dow closed up 18 points or 0.1% while the S&P gained 0.3% to 1680 and the Nasdaq added 0.3%.

Gee it’s been a white knuckle ride on Bridge Street this past week, hasn’t it? It’s as if everyone was so exhausted after the whiplash ride of a couple of weeks before they’re yet to regain the energy to even be bothered. Consolidation is nevertheless a healthy thing, and it’s no surprise that if the ASX 200 is to conquer 5000 once again it will take a bit of work. Production reports from the miners are in the frame at present, and in a couple of weeks it will all be about across-the-market earnings. With real numbers pending, it’s a good time to pause and reflect.

If Ben Bernanke’s pending testimony was behind the non-moves of the past couple of sessions, then the testimony itself is not likely to unleash any pent up energy either. Wall Street yawned, and yawned for a very simple reason. Nothing has changed.

Ever since his press conference following the last FOMC meeting, Ben Bernanke has been at pains to point out the difference between “tightening” and “tapering”, having realised that a stupid (my word) market had completely misinterpreted. Clearly he’s been particularly concerned about the sudden collapse of bond prices (spike in yields) which lends itself more to the former than the latter. As Bernanke told Congress last night, the US economy would “tank” were the Fed to tighten right now. Bond panic has been representative of a market assuming tightening.

“Tightening” means raising the Fed funds rate. The Fed has absolutely no intention of doing this soon, rather it intends to keep monetary policy “very accommodative” for the foreseeable future as long as inflation remains low. “Tapering” means, to use the analogy Bernanke must by now be sick of repeating, easing off the accelerator of bond purchases. Dropping quietly from 85 bill per month to maybe 65 bill in the first instance. The Fed still hopes to be able to begin tapering by year-end, but that will depend on the economic data. At that rate, bond purchases will take a long time to taper down to zero. At the point, QE is done. Then, and only then, can tightening be considered. An unemployment rate of 6.5% is a threshold for potential tightening, but by no means a trigger.

In other words, we are a long, long way from the Fed needing to put the brakes on US economic growth. And as Bernanke reiterated to Congress, there is no “pre-set plan”. And as I said above, everything Bernanke said to Congress last night underlines the fact that nothing has changed.

Finally, it seems, Wall Street now realises that. The stock indices went a whole lot of nowhere last night, before or after the testimony. Confirming Bernanke’s still “dovish” rhetoric was the latest Fed Beige Book. I noted when the previous Beige Book was released that the anecdotal assessment of the US recovery had been downgraded to “modest to moderate” from “moderate”. In last night’s Book it remained “modest to moderate”. It’s not the stuff of hawkishness.

The gold market hasn’t figured it all out yet though. Last night gold shot up from 1285 to 1300 when Bernanke started talking, only to quickly reverse and fall to US$1276.10/oz, down US$16.20 over 24 hours. The bond market is getting the message nevertheless, with the ten-year yield down another 4 basis points to 2.49%.

Last night’s main data release — housing starts — would have also underpinned the fact the Fed is a long way from tightening. They fell 9.9% in June to an annual rate of 836,000 when economists were expecting 950,000. It’s the lowest rate since August last. These numbers are very volatile, given the impact of the apartment block subset, and starts are actually up 10.4% year on year which is pretty healthy. Australia would die for a number like that.

On the earnings front, Bank of America continued the solid bank result theme with a big profit jump and a 2.8% rise in share price. After the bell, IBM also surprised and its shares are up 2.5% in the aftermarket. American Express fared not quite so well, and its shares are down 1.3%, while Intel disappointed, and its shares have fallen 4%. All four are Dow stocks.

Over in London, it was a case of tail wags dog for once. Typically Bridge Street looks to overnight commodity price moves before deciding whether to buy or sell the likes of BHP Billiton ((BHP)) or Rio Tinto ((RIO)) on the day, but last night copper fell 1.5% after BHP joined Rio in posting better than expected copper production. The other metals saw completely mixed moves.

Spot iron ore marched stoically on, rising another US$1.40 to US$130.40/t despite BHP/Rio production numbers.

Weekly US oil inventories were reported to have dropped a lot more than expected, so West Texas rose US57c to US$106.57/bbl and Brent, which is now trading a September delivery front month, rose US47c to US$108.61/bbl.

The SPI Overnight rose 23 points or 0.5%, which probably means we’ll be down 4 points today.

Bernanke’s testimony moves to Q&A tonight, but one doubts there’s anything new to be said. Woodside Petroleum ((WPL)) will release a production report today.

Rudi will appear on Sky Business at noon.
 

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