Daily Market Reports | Aug 29 2011
By Greg Peel
So what do you say when the eyes of the world are upon you, and you know full well that an ill-chosen sentence could plunge the markets back into crisis?
“The Fed has a range of tools,” the chairman explained, “that could be used to provide additional monetary stimulus”.
Well cheers, yes, we know that. But exactly which tool do you plan to pull out of the toolbox Ben?
“The committee will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days instead of one to allow a fuller discussion.”
You can just hear the groans, can't you. It's as if the grand final has ended in a draw and we all have to come back again next week.
Is one of those tools QE3? One might presume no it's not. If it were, one might assume as was the case at Jackson Hole in 2010, that Bernanke would appease the markets by at least overtly including more QE as an option. But one might also suggest that the situation is not quite so dire right at the moment as to require the “shock and awe” of more artificial stimulus, yet in another month's time it might be. The Fed is going to wait and see what happens, and then give the situation some serious thought – two days' worth in fact, instead of the usual one [September 19-20].
The bottom line is that the Fed has been surprised at the failure of the US recovery to gain any momentum to date, but that it still believes the second half of 2011 will see economic growth, albeit sluggish. Bernanke said as much in his speech, but he was only reiterating his most recent commentary. Around the time he was stepping to the podium, it was revealed the US June quarter GDP result had been revised down from its first estimate of 1.3% growth, to just 1.0%. Economists had expected the first estimate to show 1.6%, and then they decided the first revision would show 1.1%.
So a weaker than expected GDP revision and no QE3 was what confronted Wall Street from the opening bell on Friday. One might pick either or both factors as the reason the Dow fell 220 points from the open, even though there were few in the world actually expecting QE3 to be announced.
Can we put a positive spin on Jackson Hole? Well, yes we can. We can take away the fact that the US Federal Reserve does not see a reason to provide stimulatory re-inflation to the US economy immediately. We can also take away the fact that the Fed still has a “range of tools” it can use if necessary, meaning that an abridged form of QE, such as selling short bonds to buy long, remains on the cards.
Speaking of a “range of tools”, Bernanke also took a swipe at the US Congress, criticising the debt ceiling farce and entreating politicians to not overlook the “fragility” of the US economy in their efforts to enforce budget cuts. He insisted it was possible to use fiscal policy to address the longer term issue of the debt-laden US budget without compromising the economy in the short term. Such an insistence is consistent with what Bernanke has been saying for some time, even before the debt ceiling issue got out of hand, being that the Fed cannot be expected to carry the can alone. Post the debt ceiling wrangle, the last thing the Fed wants to be doing is providing emergency monetary measures to counter deflationary fiscal policy.
Whatever the “take away” from Jackson Hole, it proved enough for Wall Street to decide knee-jerk selling was not a necessary response. Hence stock indices turned very quickly and the Dow was up over 100 points by lunch time, which it managed to hold on to by the close. This was a pretty solid effort given traders have recently been reluctant to carry positions over weekends, meaning Friday afternoons have usually brought selling.
It was not until the Saturday that European Central Bank president Jean-Claude Trichet took the podium. Like Bernanke, Trichet did not exactly move any mountains.
The European economies face new and formidable challenges in dealing with high debt and low growth, he said. Europe was particularly challenged by its governance problems, he noted. Trichet, too, took a swipe at politicians, suggesting the eurozone move quickly to get their act together on the European Financial Stability Fund. He also suggested European banks should move to reinforce their balance sheets, but he dismissed any idea of a Lehman-style liquidity crisis, insisting that current extraordinary lending from the ECB made that “impossible”. As to whether the ECB might implement its own form of QE?
“The use of non-standard measures depends on the functioning of the monetary policy transmission and must be commensurate with the level of malfunctioning or disruption of money and financial markets and segments of markets.”
We'll take that as a no then, at least at this stage. Sounds like Bernanke and Trichet compared notes beforehand.
The bottom line is that on Friday night, Bernanke neither announced nor ruled out some form of further monetary stimulus. The markets were happy to believe the latter, given gold rallied US$56.00 to US$1827.90/oz. Up to now gold and stocks have moved inversely, implying “risk off” trading and a flight to safety, but with further monetary policy measures a distinct possibility, stock markets can feel more confident and gold will reflect the expectation of inflation.
Similarly, the US dollar index fell 0.7% to 73.72, sending the Aussie up nearly one and a half cents to US$1.0575.
Base metal movements followed those of stocks, falling initially but then rebounding with short-covering again being noted. Copper was steady but nickel jumped 3%. Oil was relatively steady, with Brent up US74c to US$111.36/bbl and West Texas up US25c to US$85.55/bbl.
The SPI Overnight gained 21 points or 0.5%.
There was concern on Friday that the NYSE may not be able to open tonight given the potential impact of Hurricane Irene and the shutting down of public transport which brings all exchange workers and Wall Street employees into the city. However by this morning Irene has been downgraded to a tropical storm, the subway is reopening, and the NYSE will open as normal. Volumes are nevertheless expected to be thin as many workers will face disruption.
There is a wealth of economic data for the US to wade through this week to provide more clues on the state of the US economic recovery, or lack thereof. Tonight see personal income and spending, tomorrow night the Case-Shiller house price index and the Conference Board leading index, Wednesday the Chicago PMI and factory orders, and Thursday chain store sales, vehicle sales, construction spending and productivity. But wait, there's more.
It's jobs week in the US, with the ADP private sector number due on Wednesday and non-farm payrolls on Friday. On Thursday it's global manufacturing PMI day, with all of Australia, China, the eurozone, UK and US reporting. On Tuesday the minutes of the last Fed meeting will be released, but with all eyes now on the September meeting these will be somewhat redundant.
Housing is in the frame in Australia this week, with new home sales out today, building approvals on Tuesday and the RP Data-Rismark house price index on Wednesday, along with private sector credit. Thursday sees the manufacturing PMI but also one of the most important data sets of all as far as the RBA is concerned – June quarter capital expenditure and capex intentions. We recall that significant capex plans from the resource sector have to date been driving the central bank's hawkish position.
We're almost at the end of result season in Australia, with three more days to go to see out August. Today's highlights include QR National ((QRN)) and Goodman Fielder ((GFF)).
It's a bank holiday in the UK tonight, so markets are closed including base metal markets.
Rudi will not appear on Sky Business on Thursday at noon as he will be presenting at the AIA Conference in Sydney instead. On Tuesday evening Rudi will make an appearance on Peter Switzer's program on Sky Business (7-8pm).
For further global economic release dates and local company events please refer to the FNArena Calendar.
