The Overnight Report: Back To The Future

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By Greg Peel

The Dow rose 108 points or 0.7% while the S&P gained 0.5% to 1848 and the Nasdaq added 0.8%.

Bridge Street bounced yesterday, albeit not quite as convincingly as Wall Street’s lead may have suggested. We didn’t make back half of Tuesday’s drop. While Wall Street is concentrating on a US recovery or lack thereof, and Europe has suddenly come good again, Australia continues to look to China and here we need confirmation Chinese economic growth is not slipping backwards once more. Australia also needs everybody back at work.

And as I have said, we have a results season to get through. So does the US.

On that score, Bank of America (Dow) posted a strong result last night, beating analyst expectations, and sending its shares up over 2%.

In US economic news, this month’s Empire State manufacturing index jumped to 12.5, up from 2.2 in December, to the highest level since May 2012. The solid bounce follows three months of weakness. These numbers do bounce around a lot, but at the moment Wall Street is looking for any reassurance Fed tapering is not premature.

To that end, the Fed’s anecdotal monthly assessment of the state of the economy in each Fed region, the Beige Book, last night declared the overall economy to be growing at a “moderate” pace and that the outlook is positive. Most of last year the Fed described growth as “modest to moderate”, so in theory this is an improvement. Or is it just a way of justifying the taper? The Fed suggested consumer spending was up, manufacturing was continuing to grow and real estate was continuing to improve. Nine of twelve Fed districts reported increased hiring.

The December producer price index came out with a 0.4% gain, as expected. The headline PPI rose 1.2% in 2013 and the core PPI rose 1.4%. This suggests no sign of QE-driven inflation whatsoever and just manages to scrape over the disinflation line.

The lack of inflation means the Fed is in no rush to raise interest rates. And this is the crux of the matter. Wall Street is not nearly as worried about the reduction in money printing (QE tapering) as it in a possible increase in the Fed funds rate from the longstanding zero-0.25% range. Indeed, many, perhaps most, on Wall Street welcome the end of money printing and the implications for artificial asset inflation associated with QE. Let the economy sort itself out, is the cry. Those still concerned the US economy is not yet ready to breathe on its own are heartened each day by any positive economic data. That’s why the jobs numbers were a source of worry.

Last night Chicago president Charles Evans, who is not an FOMC voting member, said he expects US unemployment to fall to 6.0% or lower by end-2015 but stressed that the new FOMC guidance on when it will increase interest rates calls for keeping rates low "well past the time that the unemployment rate declines below 6.5%”.

Ben Bernanke is out of it now but one presumes that he and the current Fed members rue the day it was ever decided to set 6.5% unemployment as the trigger for the first rate rise. Everyone has been at pains to water that down ever since. Yellen’s Fed has not reduced that empirical trigger, but rather dismissed any notion of a specific trigger. If the unemployment rate is more comfortable (and not just because of an ever weaker participation rate) and there are signs inflation is beginning to build, then and only then will the Fed look to the first rate increase. A weak participation rate would imply a lack of wage inflation pressure of any sort.

Between the BofA result and solid economic data last night, Wall Street staged another comeback rally. The S&P 500 is now smack on its all-time high of 1848 achieved on New Year’s Eve. The Russell small-cap is into blue sky again, as is the Dow Transports, and the Nasdaq is at a new post-2000 high. The Dow Industrials needs another 95 points.

The US dollar was also in rally mode last night, rising 0.5% on its index. Gold slipped a bit further to US$1239.30/oz and the Aussie is happily on the slide again, down 0.6% to US$0.8911.

Base metal markets have begun to hot on in London. Belying the stronger greenback, base metals were all up around a percent last night. Traders are putting it down to commodity funds coming in to buy on the back of improving economic data, and there is also Chinese New Year to consider. The lunar new year is quite early this solar year – January 29 – at which point China shuts down for a full nine days. Activity in China is always frenetic ahead of the holiday and commodities are usually being snapped up.

Spot iron ore rose US10c to US$129.60/t.

Wednesday night is Weekly Inventory Bingo in the US and this week supplies dropped. Thus, along with the positive US data, the oils were stronger. Brent was up US80c to US$107.13/bbl and West Texas jumped US$1.86 to US$94.45/bbl.

The SPI Overnight closed up 24 points or 0.5%.

Stand by today for Australia’s December jobs numbers, while Rio Tinto ((RIO)) and Woodside Petroleum ((WPL)) are among those companies providing quarterly production reports today.
 

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