Daily Market Reports | Mar 19 2012
By Greg Peel
The unfortunate by-product of economic growth is inflation. A little bit of inflation is seen as healthy hence, for example, the RBA's comfort zone of 2-3%, but beyond that the risk of a wage-price spiral threatens. The US economy has clearly improved, but the Fed has vowed to keep its funds rate near zero until 2014. There are however many, including on the FOMC board, who fear this pledge may invite sudden runaway inflation if economic improvement accelerates.
The US CPI rose 0.4% in February to mark the fastest gain in 10 months. The figure was very much impacted by a 6% increase in gasoline prices, although weak natural gas prices provided some offset. The Fed, like all central banks, ignores the supposedly cyclical and seasonal price elements of energy and food. One can understand food, but surely high energy prices is one of any economy's biggest threats, and oil prices are simply proving “stronger for longer”.
The Fed's core CPI measure came in at only a 0.1% gain, supporting its view on a lack of any inflation threat. Given a low rise in wages in the month and a strong CPI, real wages fell 0.3% in February. The result was taken as a confirmation of the Fed's view, and the US dollar index fell 0.5% to 79.81 as thoughts of any tightening of monetary policy waned.
In the meantime, the fortnightly Michigan Uni consumer sentiment measure fell to the lowest level this year at 74.3, down from 75.3 one month ago. The measure had been on the rise this year thanks to economic improvement and falling unemployment, and economists had expected a rise to 76.0 for this survey. But but the rising cost of gasoline is now biting and US consumers are beginning to crawl back into their holes.
Friday's economic data releases were not enough to either derail the week-long rally nor send stock prices surging once more. It was “quadruple witching” – a day in which stock and index options and stock and index futures options all expire together. The result was a bouncy session in a small range, with the Dow ultimately closing down 20 points or 0.2%, ending the average's longest winning streak for more than a year. The S&P nevertheless closed up 0.1% to 1404 and the Nasdaq was flat.
The biggest move on Friday was, indeed, in the oil price. The fall in the US dollar spurred traders into action and into focussing on the upcoming commencement of sanctions against Iranian crude exports from the US, UK and others. With any thoughts of releases of government reserves quashed by the White House, West Texas crude rose US$2.04 to US$107.15/bbl and Brent jumped US$3.31 to US$125.81/bbl for the new May delivery front month.
Precious and base metals were unmoved by the dollar's fall however, with gold steady at US$1659.80/oz and base metals mostly down around 1%.
Perhaps the most remarkable move on Friday was in the VIX volatility index. It fell 11% to 13.7 – a number not seen since before 2007. Clearly the options expiry impacted on the VIX, but the implication is that protection acquired in the March contracts has not been rolled into time at this point. Complacent? The VIX doesn't get much lower. It is a wonderful opportunity for investors to pick up cheap below-the-market protection against further unforeseen disaster and Australian investors would do well to consider similar “sleep at night” insurance.
The SPI Overnight was all excited for some reason, rising 30 points or 0.7%. The problem for the local market is that after a brief respite, the Aussie is ticking back up again. On Friday it rose another half cent to US$1.0581.
Next week's data will give US investors pause for thought on a string of housing market releases. The housing market sentiment index is released tonight, followed by housing starts on Tuesday, existing home sales on Wednesday, the FHFA house price index on Thursday and new home sales on Friday.
It will be a busy week for the Conference Board, which provides a US leading economic index release on Thursday and a Chinese equivalent on Friday having delivered an Australian equivalent on Tuesday.
Tuesday also sees the release of the minutes of the last RBA meeting and on Wednesday Westpac will provide its local leading economic index. New Zealand's December quarter GDP result will be released on Thursday.
HSBC's flash manufacturing PMI estimate is expected later this week, with Thursday the first possible date.
On the local stock front, today is again another day dominated by ex-divs ahead of a further scattering during the week. We have some tardy earnings results out this week, with Alacer Gold ((AQG)), Aurora Oil & Gas ((AUT)), David Jones ((DJS)) and Kathmandu ((KMD)) reporting on Wednesday and Sigma Pharmaceuticals ((SIP)) on Thursday.
Rudi will be back making his regular appearance on Sky Business on Thursday at noon and later that same day (7-8pm) on Switzer TV.
For further global economic release dates and local company events please refer to the FNArena Calendar.
