FYI | Jun 14 2007
By Greg Peel
That Egyptian river is getting mighty crowded.
US stock markets have had a torrid week, driven lower by inflation fears which have pushed up bond yields markedly and killed off any thoughts of a rate cut. Bond yields exploded up through 5% last Thursday sending stocks tumbling across the board. But last night, all was forgiven.
Investors had been concerned that record gasoline prices would have put a brake on the consumer economy. In contrast, last night it was revealed retail sales jumped 1.4% in May – a reverse of the 0.1% fall in April, twice what analysts had expected, and the best result in sixteen months. Hallelujah and pass the cheese whip.
In the meantime, crude oil for July delivery also rose 1.4% to US$66.26/bbl.
The Dow Jones posted a gain of 187 points or 1.4% – the biggest one day rise since July 19, 2006. It came out the blocks hard, drifted off, and then picked up momentum after lunch to close on its highs. The S&P 500 was up 1.5% and the Nasdaq 1.3%.
Aiding the enthusiasm was the release of the Fed’s “beige book” – a sort of anecdotal snapshot of the economy. The feeling was that the economy was expanding at a modest pace and there was no great signs of price pressures.
Inventories also rose in May, suggesting businesses had stopped their draw-downs in the face of what was thought was a slowing economy and were now stocking up once more. Import prices rose a higher then expected 0.09% – the third consecutive monthly rise – as prices for food, energy and automobiles increased. Hmmm.
The irony is that if prices are going up, and the economy is growing, and retail sales are strong, there is far more a likely chance of a rate rise than not. However, investors were no doubt heartened that bond yields contracted last night, from highs of 5.295% to 5.21%. It didn’t seem to matter that yields had powered up to these levels very abruptly in the first place.
It was all a bit confusing for the US dollar, which closed mixed against various currencies. This allowed gold some respite, and the metal managed to put on US$4.20 to scrape back over the US$650/oz level yet again, no doubt assisted by the oil price rise. Technical analysts are very worried about gold at present, but it appears you can’t kill it with an axe. Base metals were also unspectacularly mixed in New York, although a 2.3% relief rally in nickel would have been pleasing. Copper managed to put on 1.3% as well.
Wall Street doesn’t have to wait long to find out just what the state of inflation really is. Last night’s rally was a bold one – underpinning market exuberance – given tonight brings the purchasing price index (PPI) and Friday night the consumer price index (CPI). The Fed makes its next rate decision in two weeks.
The SPI Overnight rose 64 points suggesting a strong opening for the local bourse this morning. Local traders were unconvinced by the Dow relief rally last Friday, and have adopted a less enthusiastic tone than their Wall Street counterparts. Will today bring a change of heart? Perhaps that might ultimately depend on what RBA Governor Stevens has to say in Brisbane today around lunch time- his first utterance since February.
