The Overnight Report: Minutes Of Uncertainty

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED. For more info SHARE ANALYSIS: ERA

By Greg Peel

The Dow closed up 78 points or 0.5% while the S&P gained 0.5% to 1972 and the Nasdaq rebounded 0.6%.

And yesterday we went down, by 1%. Selling was largely indiscriminate, with all sectors in the red, and began from the bell, ahead of the release of Westpac’s July consumer confidence survey. That survey ensured the consumer discretionary sector was hardest hit on the day, suffering a 2.7% shellacking.

The 1.9% increase in consumer confidence in July takes the index to only to 2% above the May level, which represented a 7% fall from April. Confidence is sitting 14% below its level of last November, when people were actually excited about an Abbott government, and 10% below the 2013 average. Typically these shocks, such as May’s, are temporary, and confidence quickly stabilises. Not so this time apparently, despite the potential for the initial federal budget proposal to be watered down.

Perhaps the great uncertainty still surrounding the budget, thanks to a megalomaniac would-be puppeteer and his collection of sub-intelligent drones, has consumers sufficiently paranoid.

Despite recent ASX 200 volatility, we’re still stuck in the 5400-5500 range, so in the wider picture volatility is minimal. We just don’t know where to go next, at least until earnings season.

Beijing released China’s June inflation data yesterday, which showed an annual CPI rate of 2.3% growth. This was below 2.4% expectations and below May’s 2.5%. The PPI rate was minus 1.1% as expected. This news can be considered either good or bad – bad, if one sees disinflation that makes Beijing’s 7.5% GDP growth target questionable, or good, if one sees a lack of inflation providing scope for Beijing to inject more stimulus in order to achieve 7.5%.

Yesterday’s Bridge Street sell-off was largely a reflection of the two-day momentum reversal on Wall Street, which itself reversed from the opening bell last night. Ahead of the 2pm release of the Fed minutes, the Dow was up around 50 points.

Wall Street ultimately reacted positively to the Fed minutes sending the Dow up around 90 points within the last hour. As to why is questionable, given one might argue there was nothing new to be learnt. Perhaps the only piece of “news” is that the Fed has confirmed it will complete its tapering of bond purchases after the October meeting. This was sort of accepted as the case anyway, but what needed to be clarified was the fact the US$10bn-per-meeting tapering program would leave US$15bn by October, so the last increment will be that US$15bn rather than leaving US$5bn to cut after the December meeting.

Yes – earth shattering stuff.

Perhaps Wall Street was soothed by any lack of specific timetable being set for the first rate hike, with zero rates still set to remain in place for “a considerable time”. How long is a considerable time? How long’s a piece of string? Most would assume “considerable” implies something one might measure in years, but we know by virtue of Janet Yellen’s foot-in-mouth episode on debut that the Fed chair believes “six months, something like that” is a considerable time.

Thus Wall Street is split between those taking Yellen on her word and assuming the clock starts ticking in October, on completion of tapering, which puts the first rate hike in March. Others cite a more dovish tone within Fed rhetoric to suggest it won’t even happen in 2015. Some are worried about a recent creep up in US inflation, Yellen has called that “noise”. Some are worried the US stock market is overvalued, Yellen has suggested the stock market is “fair value”. Some are having deja vu with regard rising house prices, the Fed is not concerned.

The Fed has also made note of its capacity to implement “macroprudential controls”. What’s a macroprudential control when it’s at home? Well it’s pretty much anything a cash rate hike (or cut) is not. And it’s the latest buzzword for central banks around the world.

A change to a central bank’s overnight cash rate is a blunt instrument. It is economically universal and indiscriminate on a domestic basis. Central banks around the world, including in Australia and China, are trying to figure out how to best stimulate their economies on the one hand (in the RBA’s case simply with an historically low interest rate), while containing asset price inflation and bubble risk on the other, eg property markets. An interest rate hike would take the heat out of asset prices but boost the exchange rate and potentially kill off economic recovery. An interest rate cut would boost the economy and reduce the exchange rate but promote a housing bubble and send stock prices into dangerous territory.

Rock here, hard place over there. But interest rates are not the central bank’s only tool. The central banks of New Zealand, Canada and Finland, for example, have all tackled housing bubbles by imposing mortgage lending restrictions (mostly via LVRs). The ECB has cut its deposit rate – the return for banks parking cash with the central bank – to negative, thus hoping to stimulate lending. These are contrasting examples of “macroprudential controls” that are implemented by central banks alongside, or instead of, rate hikes/cuts.

The Fed has also now signalled its potential to use such controls in lieu of an actual rate hike. Fed deposit rate changes were mentioned in last night’s minutes. We know that the Fed has all but pledged not to let the stock market crash, but on the other hand suggested there’ll be no more corporate bail-outs. The Fed is very concerned about sparking a crash with a rate hike. The committee would rather let inflation run over target for a while than act too soon. In the meantime, it seems they’ll use every tool at their disposal to tighten policy without an actual rate hike. The hike will be the final tool.

So, six months from October? Or 2016? It will depend on the strength of the US economy, and no one can agree on that either.

If one takes last night’s response in markets other than the stock market last night, one would assume the US economy is weaker than might be assumed from the data. The US ten-year, bond yield fell 2 basis points to 2.55%, the US dollar index fell 0.2% to 80.02, and gold rallied US$9.80 to US$1328.50/oz.

Base metals trading in London officially wound up before the release of the Fed minutes, and all metals pulled back slightly ahead of both that release and today’s release of China’s June trade balance. Spot iron ore rose US10c to US$96.60/t.

The narrowing of the geopolitical premium built into oil prices has gained momentum, even as Israel attacks Gaza. The resumption of Libyan supply is supportive of lower prices, as was last night’s US weekly inventory data, which showed a lower than expected decline. West Texas thus fell US$1.47 to US$101.93/bbl, while Brent followed up Tuesday night’s fall with a US68c drop to US$108.98/bbl.

The Aussie continues to creep up, adding another 0.1% to US$0.9412.

The SPI Overnight rose 10 points or 0.2%.

The local jobs numbers are out today, along with the Chinese trade balance. Chain store sales numbers will be released in the US, which will add fire to the current debate about whether the US consumer is “in a funk” or not.

Energy Resources of Australia ((ERA)) is due to release its June quarter production report today, which ushers in the resource sector production reporting season. This season runs through July before we morph into the actual results season by August.

Rudi will appear on Sky Business today at noon and again between 7-8pm on Switzer TV.
 

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