Daily Market Reports | Sep 09 2011
By Greg Peel
The Dow fell 119 points or 1.0% while the S&P lost 1.1% to 1185 and the Nasdaq dropped 0.8%.
At 9am Sydney time this morning, scheduled to be over before the more important kick-off game in this year's NFL season, President Obama will make an address to the nation outlining his Administration's new fiscal policy measures. Outlining them is one thing – getting them through Congress past the Tea Party is another. The Tea Party's leading presidential candidate declared Hurricane Irene to be God's wrath on display against the President, but she's been awfully quiet about the devastating fires in the Republican heartland of Texas.
It would have been fair to assume, barring any outside shocks, that Wall Street would be quiet last night ahead of the speech, whether or not it was expected to be a game changer. But by coincidence, Fed chairman Ben Bernanke also had a speech scheduled last night to the Economic Club of Minneapolis. In that speech, Bernanke basically reiterated everything he said at the much anticipated Jackson Hole address last month. The Fed had policy “options”, he noted, and he didn't expand any further.
At Jackson Hole Bernanke made the point that those options would be discussed and a decision made at the September FOMC meeting, which under the circumstances would be extended to a two day session (Sep 20-21). So why on earth anyone would expect Bernanke to choose the Economics Club of Minneapolis knees-up as the best forum to prematurely announce QE3, a mere hours before the head of the nation makes his own policy speech, is beyond comprehension. But apparently Wall Street was last night very disappointed.
Extraordinary. It is a well-known fact that the Fed chairman never makes direct policy statements other than in the official statement outlining the FOMC's decisions following each six-weekly meeting. Somehow it has become accepted into folklore that Jackson Hole was the forum for last year's QE2 announcement. It wasn't. Last year Bernanke also outlined various “options”, of which QE2 was one. It was not until the November FOMC meeting that QE2 was formally announced, albeit by then Wall Street had already assumed as much.
So apparently Wall Street was off last night because there was no QE3 announcement from Bernanke. Or maybe, more sensibly, we might assume some squaring up ahead of the Obama address. After all, a hundred Dow points in this market is a quiet day.
Or maybe the impetus for some weakness, after a strong “risk on” session on Wednesday night, was the statement made by Jean-Claude Trichet after the regular ECB policy meeting that the central bank had reduced its economic growth forecasts for the eurozone. Hardly rocket science one might think, but since early this year the ECB has maintained a hawkish stance, targeting rising inflation at the same time the zone was threatening to fracture under the weight of sovereign debt. The ECB raised its cash rate to 1.5% in the middle of the mayhem, just as it had raised its cash rate in the middle of the building credit crisis of late 2007 – before having to very rapidly back-pedal.
Does this mean the ECB might be about to cut? No – it is simply more likely at this stage the ECB won't raise, which has a familiar ring for those Downunder.
Yesterday it was announced Australia's unemployment rate “surprisingly” rose to 5.3% in August from 5.1% – surprising, that is, to those who live in the parallel universe called Economist Land. For anyone else who has been reading the newspaper of late and noting a string of announced job cuts across sectors ranging from steelmaking to financial services, the result was hardly surprising at all.
The Westpac economists' take on it is that “Clearly both cyclical (a conservative consumer, restrictive monetary policy) and structural (high AUD) forces are more than offsetting any benefits from the mining boom”. Westpac's forecast for unemployment to peak at 5.5% on mid-2012 is now looking “conservative”, the economists declare, and the RBA can no longer continue to call the Australian labour market “firm”. And this was the response from ANZ economists:
“Recent RBA communications have suggested the hurdle for a near-term rate cut remains high given the Bank’s medium-term inflation outlook. However, this outlook is based on the expectation of a relatively stable unemployment rate in the near term and then renewed decline in the unemployment rate next year. Today’s number more clearly calls the Bank’s assumption into question, which should similarly result in less concern about ongoing wages pressures.”
ANZ nevertheless also notes monthly jobs numbers are typically volatile, which would tend to imply the RBA is unlikely to make a policy reversal any time soon.
It is also interesting to note, from an anecdotal perspective, that BHP has had minimal response to its offer to redundant Bluescope workers to come and take up jobs in the Pilbara. Now one can't blame those workers – upping roots in Wollongong and shifting the family to the red dust of the WA outback is not exactly a tempting proposition – but the point is Bluescope is sacking around 1000 workers and BHP has around 1400 positions it's struggling to fill. Australia's economy is “two speed” in more ways than one.
Returning to the overnight markets, the theme was one of “risk off” again after Wednesday's “risk on”. The euro fell on Trichet's news, sending the US dollar index up 1% to 76.27. The Aussie fell 0.8% to US$1.0576 (inclusive of the local jobs reaction). The US ten-year bond yield fell 7bps to 1.98%.
And gold, which had dropped sixty bucks on Wednesday night, jumped US$52.30 to US$1869.60/oz last night. Given the rise in the dollar index, those funds were flowing from the other side of the Atlantic. In the latest episode of In Europe Tonight, aside from the ECB statement, Germany and Holland have both threatened to withhold Greece's next bail-out tranche if it can't get its act together and comply with requirements “to the letter”.
Brent crude fell US$1.25 to US$114.55/bbl and West Texas fell US69c to US$88.65/bbl while in London, base metals were little changed.
The SPI Overnight fell 17 points or 0.4%, with the physical having posted a slight fall yesterday despite the big rally on Wall Street. Remember, we now lead Wall Street rather than follow it. (Don't get too cocky though – our market is more heavily influenced by offshore investors than local investors. It's nice to be a plaything.)
So the next move in markets will likely be determined by what Obama is about to say, is saying, or has said, depending on what the time is when you read this Report. Beyond that, today we'll have the monthly “data dump” from China, including the all important Chinese inflation numbers.
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