Daily Market Reports | Sep 18 2014
By Greg Peel
The Dow closed up 24 points or 0.2% while the S&P gained 0.1% to 2001 and the Nasdaq added 0.2%.
All the speculation raged around whether the Fed statement would remove the words “considerable time”, in reference to how long after the end of tapering the first rate rise will come, or not. Well, it’s still in there. Indeed, last night’s Fed statement appears little different from the statement before.
There is no change to Janet Yellen’s concerns around excessive slack remaining in the US labour market and stagnant wage growth. The Fed chair also made reference, in her press conference, to ongoing tightness in mortgage markets, such that only the safest credit risk applicants are being given loans. Yellen had previously dismissed a jump up in inflation as being “noise”, and indeed before the statement release last night, the US CPI for August showed a 0.2% fall.
That’s the first fall in sixteen months, and was largely due to the falling oil price. Annual US headline inflation is now running at 1.7% rather than the 2.0% marked in July. Core inflation, ex food and energy, was unchanged to remain at 1.7% annualised, below the Fed’s 2.0% target. Economists had expected small gains in each case.
So if the Fed is sticking to its “considerable time”, surely there would be a further reversal in markets as we saw on Tuesday night? There had previously been some big shifts on the expectation those infamous words would be removed. Realistically we should see the US dollar down, Aussie up, gold up, US bond yields down and the stock market surging. But what we saw was US dollar up (significantly), Aussie down (significantly), gold down, yields up, and a stock market that struggled to hold a new all-time high.
It’s all about “the dots”.
At each Fed meeting the twelve FOMC members submit their forecasts for the Fed funds rate into the future. These are printed on a graph as dot points, and averaged. The market continues to assume “considerable time” means next June. At the Fed meeting this June, the “dots” averaged to a Fed funds rate of 1.125% by end-2015. At this meeting, that figure was raised to 1.375%.
The expectation for end-2016 is 2.75% and for 2017 it is 3.75%. This implies that were the first rate rise to come next June, and assuming typical 25 basis point increments, the Fed will raise rates at almost every subsequent meeting to mid-2017.
So what we saw last night were a set of words that remained dovish, but a set of numbers that have become more hawkish.
Which is why the US dollar index is up 0.7% to 84.63 and the Aussie is down 1.4% to US$0.8962. Gold is down US$11.40 to US$1224.00/oz and the US ten-year bond yield is up one basis point to 2.60%.
In the stock market we saw the usual headless chook volatility immediately after the Fed statement release. Having remained relatively flat up to 2pm, the Dow initially fell 42 points before turning on a dime and rallying to be up 90 points just after 3pm. It then drifted off to close up 20 points to 17,156, which is actually the first new all-time high since July.
As I always point out, the “smart money” does not play the headless chook game in the last two hours of trade on Fed Day. That way madness lies. The smart money takes time to assess the statement and its ramifications and makes its move the next day. So tonight we should learn from the open what Wall Street really thinks about last night’s developments.
I posited in wrapping up this Report yesterday that while the rebound on Wall Street suggested Bridge Street would follow suit yesterday, don’t be surprised if the sellers use any bounce as an opportunity. This proved to be true, particularly for those usual banks and other yield stocks. The bulk of the 0.6% yesterday’s fall in the ASX200 is attributable to a 1.4% fall in the financials sector.
The banks and Telstra are the most obvious candidates for selling in the current environment. Not only are they mega-caps by Australian standards, they are also the most popular yield plays, and Telstra and Commonwealth Bank have just gone ex-div. All things being equal, we usually see a bank sell-off after they’ve all gone ex-div (the other three were three months ago) before the dust settles and the market starts buying again for the next round of dividends in November.
And as I noted yesterday, a falling Aussie undermines the value of Australian assets for foreign investors so there is an impetus to sell if the Aussie is falling. The Aussie is falling because the US dollar is rising, and the US dollar is rising because the world is now starting to set itself for that first US rate rise, whenever it might specifically come.
The point to note about those aforementioned “dots”, nevertheless, is that (a) they’re just estimates and can change back again just as quickly next time, and (b) the make-up of the FOMC committee will change as usual at the beginning of next year and the incoming members are a lot more dovish than the outgoing ones.
But hey it’s going to happen, one day, whenever that day might be. While the Fed left “considerable time” in its statement, Janet Yellen was again at pains to point out the first rate rise is not a “calendar” call. It is a data-dependent decision.
London metal traders called it rather well. The LME closes just as the Fed statement is released so we have to wait to tonight to see how base metals respond, but we saw further volatility last night. On Tuesday night a short-covering scramble ensued following the announcement of US$80bn of Chinese stimulus, but last night traders sold metals down again to square up ahead of the Fed. Copper and tin fell around half a percent while aluminium, lead, nickel and zinc fell one to two percent.
Iron ore fell US30c to US$84.20/t.
The oil market “day” sessions also close pre-Fed so last night we saw Brent little changed at US$98.97/bbl, but on a surprise US weekly inventory increase, West Texas fell US76c to US$94.04/bbl.
The SPI Overnight fell 3 points and is yet to get it anywhere near right ever since the Aussie started falling. Mind you, contrary to popular belief it is not the role of futures to “predict” anything. That’s a complete fallacy.
So that’s Game One of the triple-header decided. Game Three on Friday night is the Alibaba IPO – the biggest IPO in history by some measure – but we gear up now for Game Two tonight, being the Scottish referendum.
If you take the high road, I’ll take the low road.
The RBA will release its September quarter Bulletin today and OrotonGroup ((ORL)) will release full-year earnings.
Rudi will appear on Sky Business at noon and again between 7-8pm on Switzer TV.
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