Daily Market Reports | Aug 31 2011
By Greg Peel
The Dow closed up 20 points or 0.2% while the S&P rose 0.2% to 1212 and the Nasdaq gained 0.6%.
Never in the history of the Federal Open Market Committee have there been three dissenters. Or at least never in the history of the Fed publishing the minutes of FOMC meetings have there been three dissenters. Two dissenters has been common, at least since the GFC. The Fed has been trying to increase its transparency in recent years, but for some on Wall Street this is not necessarily a good thing. Markets would prefer a central bank that at least appears omniscient, and provides a God-like control over the US economy. Ours is not to reason why. Don't fight the Fed. Public disagreement at the Fed does not relieve uncertainty and fear.
There are twelve members on the FOMC – seven from the Fed board and five of the twelve regional bank presidents. The New York president is a fixture (the NY Fed controls the till) while the other four rotate each year. So at the Fed meeting earlier this month, three of four rotating FOMC members disagreed with the other members' policy stance. And it was not a case of disagreeing on minor or peripheral points of detail. The FOMC is split between those fearing inflation ahead and those fearing deflation ahead. It's black and white.
Those fearing deflation want QE3 – simple and straightforward. Those concerned about inflation do not want to expand the Fed's balance sheet any further due to perceived inflationary risk, or simply don't believe QE3 would do any good. It's a fair argument – QE2 has achieved zip. Nada. The period September 2010 to August 2011 may just have well have never happened.
At least those acknowledging that the lack of success of QE2 makes QE3 pointless were trying to be a bit more creative. There was a suggestion that the Fed declare it would keep its funds rate at zero until unemployment and/or inflation hit a specific target. Buy what target? Hmm. In the end it was just easier to declare the rate at zero to mid-2013. It was compromise, with dissent noted.
If the Fed can't agree on what to do, what on earth are investors supposed to think? Leave it to the politicians? God help us. There is a widespread acceptance across markets that three things could spark up the US economy – jobs, jobs and jobs. The Fed knows this too, but just can't figure out how to go about it. It is nevertheless not surprising that Bernanke announced at Jackson Hole that there remained options on the table, but that a decision would be made in a special two-day session in September. Next week President Obama will unveil his new job creation policy. No point in the Fed acting unilaterally before then.
It's not the sort of stuff that would instill confidence across America. Indeed, this month US consumer confidence has fallen the most it has since October 2008 – the month in which the term GFC was coined – to as low as it was in April 2009 – basically the GFC bottom. On the Conference Board measure, which is a separate survey to the fortnightly Michigan Uni gauge, US consumer confidence fell to 44.5 in August to 59.2. This is not a 50-neutral index. A “confident” consumer affects a reading of around 90. And on that bombshell, the Dow fell 110 points from the opening bell.
The US summer break unofficially ends with the Labor Day holiday on Monday. It's back to school next week, and for many on Wall Street, back to work. With volatility having settled down a bit from the mayhem experienced earlier in August, one can just imagine a lot of financial market types trying to squeeze in a quick respite in this final week. Volume last night was very light, and as we approach month's-end tonight we are in that period where books-close shenanigans can overcome any fundamental drivers. From down 110, the Dow then rallied to be up 90 points at about 3.45pm before dropping to be up only 20 by 4pm.
The Fed minutes came out at 2pm and received a positive response. If there was one thing the FOMC members seemed to agree on, it was that “something had to be done”. We won't find out about that something until September 21. Historically, on average, September is the worst month of the year for stock markets. It wasn't last year though, given QE2 anticipation. It might just be flat as we wait this year, assuming Europe doesn't blow up again in the meantime. Although every bit of bad news from here on will imply more decisive action from the Fed. Just look at how the market turned on last night's consumer confidence number.
And the more FOMC members who join the dissent, the more likely is QE3, or some variation thereupon. This implies inflation, and hence gold put on its inflation hat again last night, rather than its “risk off” hat, and rose US$47.20 to US$1835.70/oz. There must be some whiplashed Comex traders around at the moment. Or one might simply suggest that gold seems like a good place to hide when the world's most powerful central bank is at a loss.
That's probably the way they saw it in the US bond market, given the ten-year yield fell 9bps to 2.17% which the opposite way to go if monetary inflation is the risk.
But if the Fed does decide to re-inflate, commodity prices must rise by definition. Last night Brent crude rose US$2.14 to US$114.04/bbl and West Texas US$1.47 to US$88.74/bbl. Base metals rose 1-2% in London having been closed the night before.
Is it just me or has anyone else noticed lately that whatever Australia does, Wall Street mimics, not the other way around? So right now Wall Street's leading indicator is down 14 points or 0.3%.
It's end of month in Australia, and the last day of the reporting season (thank God). There could be some shenanigans going on. Tonight in the US sees the release of the August ADP private sector jobs report.
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