The Overnight Report: Undecided Fed Sparks The Wobbles

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By Greg Peel

The Dow closed down 89 points or 0.6% while the S&P lost 0.7% to 1828 and the Nasdaq fell 0.8%.

Bridge Street has now pushed to its highest level in 2014 and yesterday closed only 49 points shy of last October’s post-2008 high. Momentum has nevertheless slowed with profit-taking becoming apparent at these lofty levels. The focus is also on the micro with the results season throwing up some big moves in either direction. The underlying theme remains to the positive, with FNArena Result Season Monitor showing a running beat/miss percentage ratio of 32/22.

Wall Street got off to a flier again last night with the Dow rising 90 points from the bell. Never mind that US housing starts crashed 16% in January – you can’t build houses when the land is under several feet of snow. (Note, however, this number is seasonally adjusted.)

The greater focus was on the release of the minutes of the last Fed meeting.

The minutes noted unanimous board agreement to taper Bond purchases by a further US$10bn to US$65bn per month and to keep interest rates low until “well past” the 6.5% unemployment threshold. It was the first unanimous agreement since 2011. Thereafter things became a little less cut and dried.

Members weren’t so sure about continuing the tapering at the established pace of US$10bn reductions per month, with some preferring to remain more flexible. There was virtually no agreement on just when interest rates should be lifted. Either way, the minutes themselves were not enough to discourage Wall Street, given they revealed no particular change from the now established policy. The problems started when various FOMC members began opening their mouths last night.

The San Francisco Fed president suggested it would not be a good idea to diverge from the US$10bn reduction per month schedule as any change would send a “strong signal” to markets. In other words, cause panic one way or another. He also suggested the Fed should move away from numerical targets (such as the now dismissed 6.5% unemployment rate threshold) and keep guidance “verbal”.

The Atlanta Fed president, Dennis Lockhart, likes a good bit of verbal. He suggested last night that not only should the tapering continue at the current rate to its conclusion by year-end, he sees Bernanke’s target for the first interest rate hike of mid-2015, set long ago, as still being viable.

That was it for Wall Street. A 90 point gain in the Dow became a 90 point loss. It wasn’t a direct slide – the Dow was down 50, attempted a rally back and made it to the flatline, and then it fell 90.

What we can thus conclude is (a) Wall Street is happy with the tapering schedule, and any diversion would imply a weak economy, (b) tapering may be no longer an issue but Wall Street is absolutely terrified of the beginning of Fed tightening, and (c) the Fed has not a clue, collectively, when tightening will begin and what the trigger will be.

Meanwhile, life goes on.

The US dollar index rose on the minutes, by 0.2% to 80.19. Gold has slipped again, by US$10.80 to US$1312.80/oz. The Aussie is 0.4% lower at US$0.8999.

Base metals posted mixed and unsubstantial moves in London while spot iron ore lost US50c to US$123.90/t. Brent crude ticked slightly higher to US$110.52/bbl but fresh forecasting from the US weather bureau, suggesting no respite from the cold through to early March, sent West Texas crude up US$1.26 to US$103.69/bbl and US natural gas soaring 9% past the US$6 mark to the highest level in five years.

The SPI Overnight fell 19 points or 0.4%.

It’s flash day today, with manufacturing PMI estimates due from China (HSBC), the eurozone and US.

There is another big round of local earnings reports today, with AMP ((AMP)), Leighton Holdings ((LEI)) and Origin Energy ((ORG)) featuring among many more.

Rudi will not make his weekly appearance on Sky Business today. Instead, he will present at the ASA's Sydney Investor Forum, from noon till 1pm. Venue is the theatre, 1st floor, Sydney Mechanics School of Arts, 280 Pitt Street (near Bathurst Street).

Title of the presentation is "The Share Market: Always Different, Always The Same".
 

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