Daily Market Reports | Dec 16 2009
By Greg Peel
The Dow closed down 49 points or 0.5% while the S&P fell 0.5% to 1107 and the Nasdaq also fell 0.5%.
The producer price index is a wholesale inflation measure which doesn’t always get that much attention. Of more concern from an inflation perspective is the consumer price index, which reflects retailer margins on top of wholesale prices and as such is the more relevant price inflation measure. However, economists will look to the PPI as perhaps giving some indication of what the CPI might be. The US CPI for November is due out tonight.
But last night the market responded swiftly to the November PPI release. With a lot of slack still in the US economy, the Fed has been unconcerned about a rise in inflation, and indeed has warned more of deflation. Its stance is justification for a near-zero cash rate. The November PPI nevertheless came out at a 1.8% gain when economists had expected 1.0%, with the core measure (ex food and energy) registering a 0.5% gain and also blowing away expectations.
For a market jittery about a possible Fed rate rise soon, this was a red rag to a bull. The US dollar soared against all currencies, jumping 0.75% on its index to 79.95. While a little bit of inflation is a good sign for an economy, this news did not have the same impact as the fall in unemployment announced last week. Instead, the stock market fell as the dollar rose, in accordance with its 2009 trend.
November industrial production was also announced last night, and a rise of 0.8% also exceeded economist expectations. This was good news to counter the dollar problem. Capacity utilisation rose from 70.6% in October to 71.3%, indicating that “slack” is slowly being picked up as more factories re-open. But utilisation is still a long way from the long term average of 80%.
If Wall Street could take any heart in the IP number, it was shattered by the Empire State (NY) manufacturing index, which fell from 23.51 in November to a mere 2.55 in December. Economists had expected a rise to 24 for this zero-neutral measure. This marks the index’s lowest level since a reading of minus 0.55 in July.
So what’s going on? The strong October IP read was mostly led by mining production, up 2.1%, while manufacturing was also healthy at up 1.1%. It was utilities that let the side down with a 1.8% fall. This is, however, a bit of a “then” number whereas the December Empire index is more of a “now”, albeit a survey and not a set of data. Wall Street was confused.
The big rise in the headline PPI, in the meantime, was attributed to a rise in oil last month which has since reversed, while the core jump had a big element of light truck sales which is mostly a reflection of rolling into new 2010 models, and that’s likely to reverse this month. In other words, more sober heads were not seeing the PPI as a reason for the Fed to suddenly change its tune, and 30% idle capacity and 10% unemployment are sufficient reasons not to fear inflation.
But if you’re short US dollars, it’s a scary place to be as the short term speculator right now. The greenback is now at its highest level in over two months.
Another spot of weakness came with the National Association of Home Builders housing market sentiment index, which surprised economists in falling one point to 16 this month. More was expected, given the Obama administration had chosen last month to extend the deadline on its home-purchase tax rebate scheme and for the first time to include a rebate for buyers of existing homes.
It was the sort of rollercoaster day of data that might otherwise caused a rollercoaster of index movements. But it didn’t, because a tree doesn’t fall in the forest if there’s nobody there to hear it. Wall Street was weak, but again showing little interest. What was more real, nevertheless, was ongoing weakness in the financial sector. With Bank of America having issued US$20bn of new capital last month, and Citi announcing it will look to put away US$20bn this week, Wells Fargo finally chimed in with the announcement of a US$10bn issue this morning. That’s an incredible US$50bn on offer in a couple of months, into a market where no one’s around to play. Citi was down another 5% last night and the rest of the banks were mostly weak. It’s a costly effort just to ensure these bonus payments.
Adding to financial sector woes was news from the banks that credit card debt write-offs continue to pick up pace.
And over on the “Which European state is going to blow up this week?” desk, rumours flowed that the Austrian central bank had put Austria’s fourth largest commercial bank on watch – a rumour quickly denied by the Oesterreichische Volksbanken itself. Austria is jittery at present given only yesterday the government was forced to nationalise the country’s sixth biggest lender – Hypo Group Alpa Adria – due to excessive losses on Eastern European exposures.
Who’s next?
And for a last word on US data, the October Treasury international capital (TIC) flows data were released last night. This is a measure of flows in and out of US dollar assets from foreign and domestic investors and, albeit always behind the times, a trend indicator of support for the dollar. The US dollar was weak in October, reflecting money leaving the shores on the carry trade to be invested in risk elsewhere. A net US$13.9bn high-tailed it in October compared to a US$126bn inflow in September.
What every one really wants to know, however, is whether foreign central banks are still happily buying longer-dated US Treasuries – those which finance the US deficit. Auction results to date suggest this is the case, albeit with a slightly waning trend, and the TIC data reflect the same. Central banks bought US$38.9bn worth in October, but that was down from US$44.7bn in September. China bought none and Japan was actually a net seller, so the US government has Brazil to thank this time, with US$11.3bn of purchases.
Despite the big jump in the dollar, commodity action was muted. Gold is never going to fall hard on a jump in inflation, so it only fell US$3.70 to US$1122.40/oz. Silver was actually up a couple of cents. The mixed US data also had London base metals feeling mixed, with only aluminium’s 1% fall being noteworthy.
The trend-breaker was oil which, again despite the dollar, actually rose US$1.18 to US$70.69/bbl. But what we saw here was simply a bout of short-covering after a nine-day losing streak – the longest in eight years. Oil traders don’t like to be too exposed ahead of the weekly inventory data, and a slight increase in OPEC’s 2010 demand forecast set things off.
Another reason why there wasn’t a lot of action last night on Wall Street was tonight’s Fed “rate decision”. The Fed will leave its cash rate on hold, but the market will be looking for clues in the accompanying statement as to whether the Fed might look to set some sort of time frame for its first rate rise. So tonight could be fun. In the meantime, the US ten-year bond has hit a yield of 3.6%.
The Aussie tanked on the dollar’s jump, falling over a cent to US$0.9063.
The SPI Overnight was down 25 points or 0.5%.
Stand by today for the release of Australia’s third quarter GDP result.
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