The Overnight Report: Plenty Of Yellen But Nothing New

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By Greg Peel

The Dow closed up 192 points or 1.2% while the S&P gained 1.1% to 1819 and the Nasdaq added 1.1%.

Bridge Street opened with little commitment yesterday, following a flat close on Wall Street ahead of last night’s Fed chair testimony. But a turnaround in local business confidence was enough to spark interest on the buy-side once more.

NAB’s business survey for January showed its first improvement in four months, with the confidence index rising to plus 8 from plus 6. The prevailing conditions index rose to plus 4 from plus 3. The improvement was ascribed to the benefits of lower interest rates and the Aussie’s 14% fall last year easing the fear of the impact of the mining slowdown.

And on that note, the Aussie jumped a cent. It’s a frustrating game, this currency thing. While economists continue to argue whether we’ve seen the last of the RBA’s rate cuts or whether growing unemployment (see: car industry) will force another easing, the forex market has short-covered its way back to an Aussie of 90 cents after only a couple of weeks ago having a look at 86c. The problem is that signs of an improving Australian economic outlook, of which the NAB report provides one, in isolation can only lead to a stronger Aussie. What we need is a stronger US dollar to more than offset.

That will all come down to Fed policy. And to that end, Janet Yellen’s first official speech as Fed chair last night had the world holding its breath.

Anyone looking for a fresh approach in the wake of the Bernanke era would have been disappointed. The fact Yellen’s testimony to the House Financial Services Committee suggested a simple passing of the baton nevertheless sat well with Wall Street. Yellen’s testimony provided little deviation from the last Fed statement which was presided over by an outgoing Bernanke.

The Fed will continue to taper the pace of its asset purchases at future meetings in line with expected improvement in the US economy. The program is not fixed, and a pause could be implemented, but there would have to be a “notable change” in the outlook. Yellen also reiterated that the interest rates would be kept at zero “well past” the achievement of a 6.5% unemployment rate (January’s rate was 6.6%).

When asked about the weak December and January jobs numbers, Yellen suggested “we have to be careful not to jump to conclusions”. She also emphasised “the importance of considering more than the unemployment rate when evaluating the conditions of the US labour market”.

Economists expect the Fed to completely shift away from using the unemployment rate as any sort of policy guide.

Yellen also suggested volatility in global markets was not causing the Fed to rethink its stance – a reference to collapsing currencies and rising bond rates in emerging economies as US funds are withdrawn now the taper is in train. “Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook,” she said. In other words, “God bless America and f— the rest of you”.

No change to US policy there.

And no change overnight to the US dollar index which, despite further tapering confirmation, is currently stuck in the mud. Last night saw no movement from 80.63. With the US winding back QE on the one side, and Japan pumping away and the eurozone always ready to jump on the other, one would expect the dollar index to be higher by now. The Aussie is not in the dollar index basket so there is no direct correlation, but we can be confident that if the dollar index is rising, the Aussie is falling. Recent weak jobs and manufacturing data in the US have kept the dollar at bay.

Is Wall Street’s pullback over? That remains a matter of contention. The S&P 500 is now back over 1800 once more but has only regained about half of the 6% drop from the New Year’s Eve all-time high. Volumes have not been convincing and there is no sign of fresh money flowing in. A straw poll would probably find the majority expects (hopes?) a true correction is still forthcoming.

Wall Street did not quite finish on its highs last night. The Dow was up 226 points with half an hour to go but a breach of 16,000 brought in some late selling. The US ten-year bond yield rose 4 basis points to 2.72% which suggests the bond market is starting to dismiss recent weak US data. But a funny thing happened in gold.

Having risen over the last several sessions, last night gold jumped US$17.00 to US$1291.80/oz. Some short-covering, perhaps, but by rights confirmation of the taper program should see gold go the other way. Many are now suggesting gold was oversold at 1200 and point to strong Chinese physical demand as reason enough for gold to be higher. Or is gold being used as a hedge against that “notable change” in the US economic outlook that would bring a pause to Fed policy?

Base metals dutifully did nothing last night and nor did the oils much move, with Brent at US$108.53/bbl and West Texas at US$99.89/bbl. Spot iron ore fell US80c to US$120.00/t.

The Aussie is up 1% at US$0.9038.

Forget about potential disappointment among local earnings results – the SPI Overnight is up 36 points or 0.7%.

On that note, today sees reports from Boral ((BLD)), Commonwealth Bank ((CBA)), CSL ((CSL)), OZ Minerals ((OZL)) and Stockland ((SGP)), among many others. Westpac will release its consumer confidence survey and China will report its January trade balance.

Rudi will appear on Sky Business at 5.30pm.
 

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