The Overnight Report: Fedhead Babble Clouds The View

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By Greg Peel

The Dow fell 49 points or 0.3% while the S&P lost 0.5% to 1701 and the Nasdaq dropped 0.2%.

Yesterday’s session on Bridge Street was fairly dour and light on volume as the local market tries to figure out what to do from here. It appears we have now ticked off Syria as a risk and we have certainly ticked off the German election. As yesterday’s data indicated we can become increasingly less concerned about China so that just leaves a dysfunctional US as the issue. That, and the question of whether Australian stocks are overvalued at this level.

Yesterday the ASX 200 fell early by over 50 points in response to weakness on Wall Street on Friday which represented St Louis Fed president James Bullard’s suggestion tapering could begin in October. At 11.30am HSBC’s flash estimate of China’s manufacturing PMI suggested an increase to 51.2 in September from August’s 50.9. The ASX 200 responded by halving its losses, and then stayed there for the rest of the day.

The Aussie also bounced, and is up 0.4% from Saturday morning to US$0.9434. With the US not playing to script – not tapering – we are not seeing the US dollar rise and Aussie fall as expected. The Aussie is thus beholden only to China, and good news from China means a stronger Aussie, which tempers the flow-on good news for Australia. The Australian economy is never going to be able to transition away from its mining dependence unless the Aussie can go down.

As when the Aussie might go down, well that depends on the Fed. And on the US government. In terms of the government, next week brings Obamacare funding into play and at this stage the Republicans are hell bent on “defunding” the program. If so, the Administration will shut down the government. Public service workers will not be paid. It is, of course, a staring competition, and even if the government does shut down for a period no one expects it to last too long. But the standoff is not helping, and thereafter we hit the debt ceiling debate.

We’ve been here before, back in 2011, when the government did briefly shut down. The two parties fairly quickly decided to make a later decision – the famed “kicking the can down the road” – and life went on. Wall Street has subsequently seen new highs. Wall Street is mostly assuming the same sort of farce to play out again, and is thus not majorly concerned. But fiscal policy plays into the Fed’s monetary policy decisions, and this is where the confusion, and anger, lays.

A couple of years ago Ben Bernanke decided the Fed should be more open with its policy thinking, providing more communication and more disclosure. Back then the new openness was welcome. In 2013, everyone wishes the Fedheads would just shut up. For months in the lead-up to the September FOMC meeting we had a public taper discussion between the various Fed presidents, voting and non-voting, arguing their policy stances one way or the other. The net result is that Wall Street came to assume tapering would begin in September and set its books accordingly. After all, wasn’t this the reasoning behind greater Fed communication? To reduce knee-jerk volatility?

Last week the Fed shattered that illusion and destroyed five years of credibility. Not because the FOMC made the call it was too early yet to taper, but because the members and Bernanke allowed Wall Street to believe tapering was a given. Few disagree it’s possibly too early to taper, but that’s not the point.

The non-tapering decision was barely two days old when Bullard revealed that despite a 9-1 vote, it was a close call, and that tapering may begin in October. Last night the Fedheads went berserk. Where’s that spotlight? Me, me, me!

The Atlanta Fed president suggested the US economy is losing steam. New York agreed accommodative policy is still needed. Dallas fought back, pointing out he actually wanted to start tapering last week (even though Kansas City was the only dissenter). Vice-chair Yellen, who’s opinion is clearly of influence as the assumed heir apparent, declined to comment and indeed cancelled her own speech for that very reason.

And these people aren’t even politicians!

So the result was further confused weakness on Wall Street on a day the Dow welcomed in Goldman Sachs, Visa and Nike and bade farewell to Bank of America, Hewlett Packard and Alcoa, and Apple soared again having defied the critics and sold a lot more of the new iPhones than expected.

There were also some actual data releases. The Chicago Fed national activity index increased to plus 0.14 in August from minus 0.43 in July, while the US flash manufacturing PMI suggested 52.8 in September, down from 53.1 in August. More confusion.

Over in Europe – the economy that actually is recovering (and let’s not even mention the UK) – the flash reading was a better than expected 52.1, up from 51.5.

The US dollar index remained steady last night at 80.46 and gold slipped US$3.00 to US$1322.50/oz. The US ten-year yield fell another 2bps to 2.71%.

Aluminium and zinc jumped 1% in London while the other base metals barely moved. The reopening of a previously strike-bound pipeline in Libya helped the oils lower, with Brent down US$1.06 to US$108.16/bbl and West Texas down US$1.39 to US$103.36/bbl.

Spot iron ore rose US60c to US$132.40/t.

The SPI Overnight fell 28 points or 0.5%.

There’ll be more US data to contemplate tonight with two house price indices, consumer confidence and the Richmond Fed index. Locally, Kathmandu ((KMD)) is due to report full-year earnings.
 

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