FYI | Sep 21 2006
By Greg Peel
When the Fed left rates unchanged in August the Dow Jones index actually fell on profit taking given the run sparked by positive data leading up to the Fed meeting. This month the data have been mixed, but tending to suggest the inflation beast has been tamed.
In the end there was little surprise on Wall Street when the Fed held at 5.25%. Falling oil prices largely put paid to the thought of another rise, but the market went quiet this week just in case. The Dow already rallied early in the day and held its gains to finish up 72 points to 11,613 – a rise of 0.6%. The S&P500 managed 0.5% and the more volatile Nasdaq starred with a 1.4% rise.
The oil price had only begun to recede ahead of the August meeting, and since then has fallen some 20% to under US$61/bbl last night. The Fed noted:
"Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand".
However:
"Some inflation risks remain."
With the oil price $17 lower, and many commentators calling a settling at US$50/bbl, the “inflation risk” warning just seems to have less teeth than it used to. This is despite one Fed president actually voting for a rise. The feeling seems to be that consumer spending can resume its merry binge once more.
The US$50/bbl crowd are a bit of a “told you so” bunch. Just watch them evaporate if oil heads straight back to US$80/bbl. Don’t think it couldn’t happen, as tensions between Iran and UN might be tempering but tensions between Iran and the US are only getting worse. And let’s face it – the UN is irrelevant. As if Bush honestly gives a hoot what the Security Council comes up with.
That said, the noticeable thing about oil now is that the public has spoken, and that the world has had enough. Public transport has become more popular, bicycles have become more popular and smaller cars have become more popular. This will not just flip back because the oil price has receded somewhat. And despite every effort of global oil companies, alternative forms of energy, whether fossil or renewable, are being rushed through development. Once again, a slight correction is not going to stifle this investment.
The US may be smiling once again as inflation fears abate, but the fact remains the US is presently in a stagflation environment. The housing crash will likely stifle any consumer pick-up based on lower oil prices. There are many who believe a recession is at hand. (See “US Heading For A ‘Sharp And Ugly’ Recession”, 20/09/06).
Gold had an interesting night. Despite the expectation that the Fed would not raise rates the gold price rallied during the day as buyers entered the market. This sparked some short-covering. The futures market actually closed before the announcement but gold was slammed in the late market, most likely by central bank selling, and possibly by those with an agenda to keep the gold price low.
European central bank selling is due to cease on September 24, but unofficial selling may well meet every rally yet, or force the gold price back to US$550/oz as some commentators are predicting.
The early gold rally came about despite a further fall in the oil price and despite some heavy selling in base metals markets. Yet in later trade, major base metal markets recovered to close higher on the day.
After a heavy selling in the ASX200 yesterday, one can probably expect some sort of recovery today, with the SPI overnight closing up 20 points. Nevertheless, it is a fairly directionless market in Australia at present.