FYI | Jun 29 2006
By Greg Peel
"It’s only words, and words are all I have, to take your heart away" – Barry Gibb
The most anticipated FOMC meeting in recent history is over and the news is good. At last Bernanke’s hawkish tone has moderated.
The spectre of inflation has hung over financials markets like a sticky ooze since April. While economists across the globe were warning that jumps in core inflation are to be expected, but that they will still be temporary, fear surrounded the possibility that Fed chairman Ben Bernanke would do what many of his predecessors had done early in their terms – try to stamp their authority and completely stuff things up.
As the inflation numbers began to stack up, hawkish rhetoric flowed like acid from Fed state offices around the US. While a monetary pause had been hoped for at this point (5.00%), it quickly became apparent that another 25bps was on the cards.
A 25bps rise then became a given, and talk turned to another 25bps in August, or worse still a 50bps rise for June, or even worse 6.00% by Christmas.
Were last night’s meeting to produce a 25bps rise only, the number itself would have been insignificant. What really mattered was whether the Fed’s accompanying report would signal more rises to come or not. Even if not specifically flagged, it would all come down to tone. Would it remain hawkish, or could we find a possible monetary pause in between the lines?
The result could not have been more of a relief. Not only was the rise 25bps, but Bernanke noted that "inflation expectations remained contained" and said that "the moderation in the growth of aggregate demand should help to limit inflation pressures over time". Funnily enough, this is pretty much what he said in the May meeting as well, however as inflation numbers have been slightly more ominous in the meantime, a lack of added inflation-busting determination is as good as a red rag to a bull.
And I mean bull. The Dow Jones rallied 217 points. This was as good a result as the stock market could have hoped for, and recent weakness even suggested the downside was limited anyway, given the fear that had already brought the Dow to this point.
Gold rallied some 3% to be testing the US$600/oz level once more. Many observers suggest gold might need to do some work at this level, but if it breaks then we’re back on track. Base metals put in similar performances.
It is hard to see the Australian stock market having anything but a good day today. Not only is there a relief-rally lead to follow from the Dow, and commodities are up, it is the last day of the financial year and fund managers will be stoking that bullish fire as hard as possible, particularly at the close, in order to ramp up prices and provide a positive but potentially unrealistic measure of their annual performance.
Will this signal the end of the correction? That would be a big call. Most respected observers believe there is still some pain to work through in coming months as uncertainties prevail. Liquidity is tighter, risk appetite is lower, Japan is yet to raise rates, and China is looking wobbly. Nevertheless, tax loss selling in June ensures there is plenty of cash to spend in July. If it’s not the end of the correction, it might at least be intermittent burst of optimism.