Daily Market Reports | Jun 25 2009
By Greg Peel
The Dow closed down 23 points or 0.3%. But as each day passes, the relevance of this industrial price average diminishes more. What we really want to know is that the S&P 500 closed up 0.7% to 900. The tech-laden Nasdaq rose 1.6% following a positive earnings report from Oracle, posted after the bell on Tuesday.
The market opened with the news that new home sales fell 0.6% in May and prices fell 3.4% year on year. Inventories fell slightly but stocks held by builders rose. This was not the sort of green shoot news Wall Street wanted, but the numbers were soon to be swamped by more economic data.
New orders for durable (as opposed to consumable) goods were expected to fall slightly in May, but instead they jumped 1.8%. Durable goods demand is considered a valuable indicator of the state of an economy. Excluding defence-related orders and aircraft orders (the former lending little to economic conditions and the latter lumpy and volatile), orders rose 4.8% following a 2.9% fall in April. This was the biggest jump since 2004.
And that was enough to send the Dow up 100 points in the first hour (I’ll still make reference given Dow points are what investors most relate to). The market began to drift thereafter once the buyers had been satisfied, ahead of the Fed monetary policy announcement due at 2.15pm. At 2pm the Dow was only up 45.
Before the Fed could make its announcement there was the small matter of a record US$37bn of 5-year Treasury notes to deal with. The auction was, however, well subscribed, and so it was on to see whether the Fed would announce a step-up in its quantitative easing policy or continue with current levels. The market was split ahead of the statement release.
“Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months.”
This opening gambit was comfortably positive, although little changed from the previous statement. However…
“Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.”
What the Fed is saying here is that it no longer fears deflation. Weak economic activity provides fuel for deflation, but the Committee believes it has done everything just right to provide economic growth in the “context of price stability”. The flipside – that which the market has most recently feared – is that ecenomic stability leads to a sudden turnaround back to inflation. In the context of America’s burgeoning national debt, and of quantitative easing, if this genie was let out of the bottle the ramifications could be devastating. But on that subject…
“The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.”
In other words, the Fed expects the economy to stabilize but growth to remain weak, and that the amount of excess capacity in the weak economy to keep the lid on any runaway inflation fears. Not too cold, not too hot.
And clearly this Goldilocks state, for which the Fed credits its own actions as well as government stimulus, means the Fed need do nothing different to what it is doing now. The funds rate remained unchanged at zero and will be there for some time. This everyone expected. But the Fed went on to simply reiterate its quantitative easing policy plans (including buying a total of US$300bn of bonds) – no more, no less.
This bit Wall Street didn’t like. The stock market has been closely watching the 10-year bond yield of late, and although the threat of it bursting up through 4.0% seems to have subsided, there is still nervousness. If the Fed is not going to buy anymore than the value of bonds already long ago declared, what’s going to stop the yield from heading north once more (meaning investors selling the bonds)?
The result was that the stock market tanked immediately after the Fed release, dropping to be down more than 60 on the Dow with twenty minutes to go. Some late buying stopped the rot. The stock market seemed more nervous than the bond market, as the 10-year yield rose only 6 basis points to 3.68%. The stock market is a little bit pullback-wary at the moment.
The US dollar spun around yet again, this time rising on the index to 80.51. Despite what the Fed said, the market is looking ahead to the Fed having to raise rates if it no longer wants to quantitatively ease further (which is a means of lowering rates in effect when you can’t drop the funds rate below zero).
Gold had one of its rare days when it ignores its inverse relationship with the US dollar, and simply rose on the inflation trade, by US$4.80 to US$930.60/oz.
What was lost in the wash of durable goods and Fed statements on Wall Street last night was an update from the Organisation for Economic Cooperation and Development (OECD). Despite a World Bank downgrade for the global economy earlier in the week, the OECD revised up its estimate for the 30-nation bloc for the first time in two years, suggesting 0.7% growth in 2010.
The London metals Exchange closes at 2pm New York time, thus metals trading missed the Fed statement. A combination of the durable goods number and OECD revision sent speculators into a technical short-covering frenzy, according to Basemetals.com. Only tin missed out in otherwise across the board 3-4% jumps.
Oil had traded higher in the session, but closed in New York after the Fed statement and stock market response down 57c to US$68.67/bbl.
The Little Aussie battler was a bit confused by all of this – US dollar up, base metals up – so it rose slightly to US$0.7957.
The SPI Overnight jumped 22 points or 0.6%.
