The Overnight Report: What Now Ben?

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By Greg Peel

The Dow closed down 8 points to 15,967 while the S&P lost 0.2% to 1787 and the Nasdaq fell 0.3%.

“At recent meetings,” the RBA  noted in the minutes of its November meeting, released yesterday, “the Board had judged that it was appropriate to leave the cash rate unchanged while continuing to gauge the effects, including in the housing market, of the substantial degree of monetary policy stimulus that had been put in place over the past two years. There was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values, and given the lags with which monetary policy operates, the stimulatory effects would likely continue coming through for some time. At the same time, inflation remained within the target and the Australian dollar, while below its level earlier in the year, remained uncomfortably high. Members noted that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy.”

So what to do?

“The Board's judgement was that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects, but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity, consistent with the inflation target. The Board would continue to examine the data over the months ahead to assess whether monetary policy remained appropriate.”

It would appear the RBA is not concerned about asset price inflation in Australia, nor media beat-up over a housing “bubble”. Monetary stimulus, in the form of cash rate cuts, is “supporting asset values”, the board suggests, in a reference to the property and stock markets, but CPI inflation remains within the target range. The board is more concerned about the stubbornly high Aussie, which it fears will derail attempts to rebalance growth in the Australian economy away from mining and towards other sectors. Hence the RBA is “not closed off to the possibility” of another rate cut.

No doubt Glenn Stevens furrowed his brow in frustration yesterday as the Aussie traded higher on this news. Why higher? Because the RBA suggested it could cut the interest rate, but it didn’t say it will.

Nor can Glenn ever expect some assistance out of the ECB. As Europe’s economy once again shows signs of faltering and deflation begins to threaten, last night the ECB vice president suggested QE could be used to pull the eurozone out of stagnation but to date the central bank has not discussed just how that might work. Aside from first needing to cut the cash rate to zero from 0.25%, the eurozone has no common bond, a la the US.

Meanwhile the QE debate rages on in the US, with December still supposedly on the cards for tapering but March remaining the popular expectation. That is, as long as the new year budget negotiations don’t descent into another farce. This morning, Sydney time, outgoing Fed chairman Ben Bernanke will make a speech, and as Wall Street toys with fresh psychological highs – “big figure” resistance – no one was too keen last night to take a stand either way in the stock market. Last night the Dow again traded briefly over 16,000 before failing, while the S&P made it only to 1795 before backing off.

There will clearly not be any help from the ECB or Bank of Japan, but at some point the Fed will begin tapering, and only then are we likely to see any relief for the Aussie. This is what the RBA is counting on in its suggestions that eventually the Aussie will be a lot lower. On that basis, economists do not forecast a rate cut in the near future, but they do not foresee a rate rise to combat asset price inflation in the near future either. Probably not in 2014.

The Aussie is up 0.6% over 24 hours to US$0.9427 despite the US dollar index being only 0.1% lower at 80.83.

Nothing else much moved last night, in concert with Wall Street grinding to a halt and anticipation of what may emanate from Ben Bernanke this morning and the Fed in general at this time.

Gold is up a tad at US$1274.90/oz. Base metals are little changed. Brent crude is unchanged at US$108.56/bbl and West Texas is up US37c to US$93.40/bbl. Spot iron ore is down US70c to US$136.30/t.

What has changed is perceptions for today’s trade on Bridge Street, as suggested by a 26 point, or 0.5%, fall in the SPI Overnight. Is the futures market anticipating another round of currency-related foreign selling, as we saw exactly a week ago?

Aside from whatever Mr Bernanke might say this morning, the minutes of the last Fed policy meeting are due tonight. Catch-up data will also be released for US retail sales, existing home sales, inventories and inflation.

It’s quiet a busy day locally for mid-cap AGMs, with Myer ((MYR)) and Virgin ((VAH)) among the many.

Rudi will not be making his regular appearance on Sky Business this evening.
 

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