Daily Market Reports | Mar 19 2014
By Greg Peel
The Dow rose 88 points or 0.6% while the S&P added 0.7% to 1872 and the Nasdaq jumped 1.2%.
The minutes of the March RBA meeting, released yesterday, noted:
“At recent meetings, the Board had judged that it was prudent to leave the cash rate unchanged, while noting that the cash rate could remain at its current level for some time if the economy was to evolve broadly as expected. Developments since the previous meeting had supported that assessment. There were further signs that low interest rates were providing support to activity, with improved economic conditions evident across a range of household and business indicators. While the labour market was expected to remain subdued for a while and wage growth had declined, the Board observed that this was consistent with conditions in the labour market usually lagging changes in economic activity. The decline in the exchange rate seen to date would assist in achieving balanced growth in the economy, though members noted that the exchange rate remained high by historical standards.”
Which is basically what Glenn Stevens’ statement suggested at the time. But for some reason the forex market seems to believe the meeting itself and the minutes of that meeting are two different events, and thus reacts twice. As to which way the Aussie was going to run yesterday, that depended on a compromise between “cash rate could remain at its current level for some time” and “the exchange rate remains high by historical standards”. The cash rate won, hence the Aussie is up 0.4% to US$0.9126.
The stock market should, in theory, be happy if there is no need for further rate cuts given that implies a sufficiently stable economy. It doesn’t work that way of course, because everyone covets the direct benefit of lower borrowing costs. Bridge Street jumped from the bell yesterday but waned as the session progressed, culminating in a lacklustre response to the peaceful annexure of Crimea by comparison to other world markets. The big 80 point sell-off on Friday has not been recovered.
Perhaps it was really just an excuse to adjust prices. One by one, economists are coming to the conclusion the chances of another RBA rate cut in this cycle are now remote, and if anything the next move will be up. If rates do start to rise it implies the Australian economy is transitioning as hoped, but it also undermines the value of the stock market yield play. That said, any rate rise would be a long way off and not likely this year, at this stage.
Wall Street kicked on last night, deciding that Crimea will be handed over to Russia without a gun being fired and then we can all get some sleep. The asset and visa freeze imposed by the US and Europe on a handful of Russian big wigs is more symbolic than effective, and the world can breathe easy there has been no tit for tat in, for example, Russian energy supply.
It was thus back to the business of assessing domestic economic data last night on Wall Street, and refocusing attention on tonight’s Fed meeting and first press conference for Janet Yellen.
Last night’s housing data were mixed. Housing starts fell slightly in February after a big fall in January, but that’s an easy one to attribute to the weather. On the other hand, building permits, which represent the step before housing starts, jumped 7.7%. That’s the good news.
The bad news is those permits are broken down into a 24.3% increase in permits for apartment blocks and a 1.8% decrease in permits for single family homes. Single home permits peaked in November and have drifted lower ever since, and they are the bread and butter of the US “housing market”. Apartment blocks and other multi-family dwellings are okay, but they are much cheaper per dwelling and thus provide less of an economic boost.
The US CPI rose 0.1% on both the headline and the core rate in February, suggesting inflation remains subdued. Gasoline prices fell sufficiently in the headline result to offset the soaring cost of heating, while food inflation only ticked up slightly. The Fed ignores food and energy costs, but economists point out that the harsh winter in the east coupled with a drought in California will conspire to send food prices surging in months to come, thus hitting the consumer.
But shucks, let’s get this market back to its all-time high and then worry about it.
The US dollar index was once again little moved last night at 79.39 but gold took another tumble, falling US$11.20 to US$1355.30/oz, as the Ukraine premium further evaporated. The US ten-year bond yield has steadied at 2.68% and the VIX volatility index has also wiped off its Ukraine risk premium and is now back under 15.
Base metals were all up around 1% last night with the exception of copper, which was steady, and traders reported little activity overall. Spot iron ore rose by US90c to US$110.50/t.
An announcement that the Seaway pipeline out of the West Texas Intermediate hub at Cushing would have its capacity doubled led to a big jump in the WTI crude price, up US$1.57 to US$99.65/bbl. Brent has rolled into the May delivery contract and it rose US41c to US$106.65/bbl.
The SPI Overnight rose 14 points or 0.3%.
David Jones ((DJS)) will report its interim profit today and tonight attention will be turned to the Fed meeting and press conference.
Rudi will appear on Sky Business at 5.30pm.
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