FYI | Aug 08 2007
By Greg Peel
Nothing much was ever going to happen on Wall Street last night ahead of the Fed’s rate decision and accompanying statement in the early afternoon. Little attention was paid to the productivity growth figure, which was below expectations but positive nevertheless, or the labour cost growth figure, which was positive but below expectations as well.
Some traders had come to believe that given the crisis in the credit markets and the possible ramifications it would have for economic growth the only option open to the Fed would be to ease rates and assume inflation would be curbed anyway. Others doubted the Fed would throw a lifeline to credit markets that had blown themselves up by their own greed, and further believed the crisis was significantly containable and simply a return to saner credit spreads. Thus the scene was set.
When the Fed announced rates would stay the same, it was the former group that panicked. Oh no, there is no cavalry. The Dow was quickly sold down 121 points.
But then once everybody had had enough time to absorb Bernanke’s statement, the market came to realise that by not easing rates the Fed was not sufficiently concerned that the pullback was anything more than just that. Bad news became good, and the market turned around and ran 261 points to be up 140 points half an hour out.
In the final half hour, there was a quick reversal once more and the end result was up 35 points on the day. Only a double-digit move? That seems very calm in the context, but clearly the extreme level of volatility is still very much in place.
Most notable in the Fed statement was that the central bank’s predominant concern “remains the risk that inflation will fail to moderate as expected”. This is notable because it’s exactly what Bernanke said last month, and pretty much the stance taken ever since Bernanke took over from Greenspan. If the Fed is still worried about inflation, that means it still expects positive economic growth. Thus, while the housing crisis was acknowledged as not being over, the market can be assuaged that the Fed does not believe the credit crunch will upset the bigger picture – the Goldilocks scenario.
Some commentators have been quick to point out that this current volatile period is occurring right in the middle of the summer holidays, and “there’s no one over thirty on the trading floor”. In other words, it’s a case of wait and see what happens when the real players return. Not that daily volume has been thin – quite the contrary in fact – but volume has tended to drop off around the edges, particularly in last minute moves. Last night’s volume was down from the day before, but NYSE advancers did beat decliners by a more healthy 3 to 2.
The charge was led once again by the financials, which continue to drag back ground from what was clearly a short term oversold position. Bear Stearns, for example, has recovered 8% from its lows. But the surprising move last night was a return to confidence in the value of builders, which had been equally trashed in the stampede. If the Fed is not concerned enough to lower rates, then builders must also be oversold.
For the rest of the markets, it was a neither here nor there day. The US dollar, ten-year bonds, gold and oil all posted unsubstantial moves. Base metals tended to the positive.
The Fed’s decision has come too late for the RBA to be influenced by it, as the RBA has already made its own rate decision which it will announce at 9.30 this morning. There is a feeling that as Wall Street rallied, rather than collapsed, on Monday, any thought the RBA may have had to keep rates on hold would have dissipated. All signs are inflationary, and that is most likely what the RBA will respond to.
This will thus be an interesting day for the local bourse. Possibly wracked with confusion after a volatile night, the SPI Overnight matched the Dow and closed up 35 points.