FYI | Jul 20 2006
By Greg Peel
The Dow Jones Industrial Average rallied 212 points overnight to finish at 11,011, a rise of nearly 2%. The tech-loaded Nasdaq was up 1.83% and the broad market S&P500 was up 1.86%.
This was probably the most anticipated CPI figure in economic history, given the fate of the US economy was in the balance and this one little bit of data could tip it over in a climate of global unrest and soaring oil prices. The greatest fear was fuelled by the knowledge that Fed chairman Bernanke was a self-confessed hawk with a distinct dislike of inflation.
In wasn’t a good figure. At 0.3% rise for May it represented the fourth straight rise and took the year-on-year increase to 2.6%. The Fed’s comfort zone is 1.75-2.00%.
However, Bernanke surprised many in changing tack in the wake of seventeen straight interest rate rises. He conceded that the high oil price, while fuelling inflation, was also having a dampening effect on economic activity anyway. Hence to raise rates once more only increased the danger of a double-whammy on the economy. This implied the long-running tightening policy had come to an end.
Although Bernanke did throw in a parting warning that inflation was still a danger, Wall Street sighed a breath of relief and opened the bull pen.
Financials led the charge as US bonds quickly wiped out most of their rate rise anticipation. Techs rebounded despite poor results from the likes of Yahoo! yesterday. After the bell, Apple posted an earnings result 23% better than expected, driven by growing sales of iPods and Macs.
Adding to the bullish sentiment was yet another fall in the oil price to US$72.66/bbl. This was not due to any further easing of tensions in the Middle East (if anything the situation is worsening) but by figures showing US stockpiles were greater than expected.
As rate rise expectations diffused the US dollar fell accordingly and, despite a falling oil price, allowed gold to return to bullish sentiment as profit-taking ended and the flight to the safety of the US dollar likely reversed. At last count gold was trading at US$642.60/oz.
Base metal prices rallied across the board as well, and early SFE indications are that the Australian stock market is heading for a good day. Happy trading.