FYI | Mar 22 2007
By Greg Peel
Last night’s Fed rate decision was never going to be about the number, as no one expected there to be a change either way. Sure – sub-prime mortgage concerns may have led to thoughts of a possible cut, but then mixed economic data and the ever present spectre of inflation pretty much cancel that out.
So what Wall Street was always going to focus on was the accompanying Fed comments. For unlike the RBA, the Fed provides commentary whether it changes monetary policy or not.
A now ubiquitous comment remained, regarding ongoing concern over the "risk that inflation will fail to moderate as expected". However, it was what was left out for the first time in a long time that sent traders rushing to buy stocks. The line “additional firming that may be needed” was missing!
Conclusion: the Fed is not looking to raise rates again. Implication: if anything the next rate move will be down.
Every sector responded positively to this omission, leading to a 1.3% rally in the Dow – up 159 points to 12,447 – and rallies of 2% and 1.7% in the Nasdaq and S&P 500.
Adding fuel to the fire was the quarterly result from investment banking giant Morgan Stanley, which at 70% profit increase posted a record. Result aside, Morgan Stanley management made special mention that its mortgage business was a “significant contributor” to the bottom line. Suddenly, all those fears of the sub-prime crisis spilling over into the prime market began to evaporate. The underperforming financial sector had a cracker day.
Even the beleaguered building sector put in a solid turnaround, based mainly on comments by the Fed that “adjustments” were going on in the housing market – not devastation, just “adjustments”.
Monetary policy implications were also good news for gold, which continued its upside graft with a US$6 rise to US$664.30/oz. Interestingly, records for the previous week have shown that between March 12-16, two ECB central banks sold a total of more than 16 tonnes of metal. History shows that such sales usually weigh heavily on the gold price. A previous, similar sale in December pushed spot down by US$15 over the period.
But last week, gold managed to rally by US$4.
Gold bulls are heartened to know that their little soldier is battling on courageously through serious mortar fire.
The base metal complex continued its disparate movements again last night, with slight increases across the board other than for zinc, which fell 1.6%. Nymex oil has rolled over into the May contract, which rose slightly for the first time in a few days to close at US$59.61/bbl.*
After a lacklustre day yesterday, the local bourse is being tipped for a solid performance by the SPI Overnight which rallied 90 points to close bang on the magical 6000 again (June contract).
(*The oil forward curve showed over US$2/bbl contango from April to May, such that previous levels in the US$56s now jump to US$59s, although the actual price rise last night was only around US20c. FNArena publishes the Nymex closing price given Nymex is by far the world’s biggest oil market, albeit largely on paper.
The reason why April rolls into May while we’re still in March is because oil is a deliverable contract. While some 97% plus of contracts are closed out to cash beforehand, the remaining 3% or less has to be delivered to Cushing, Oklahoma. Contract holders are thus given sufficient time to achieve this.)