The Overnight Report: The Fed Confounds

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By Greg Peel

The Dow closed up 59 points or 0.4% while the S&P gained 0.3% to 1986, a point shy of its all-time high, and the Nasdaq was flat.

Reserve Bank governor Glenn Stevens took a swipe at the government yesterday in his biannual testimony to a parliamentary committee, implying the central bank cannot be expected to do all the heavy lifting. Australian businesses need to take more risks and invest in growth, he said, rather than just give money back to shareholders. But for that to be encouraged a more conducive fiscal framework is required, he implied.

Perhaps another reason not to expect a rate cut below 2.5%.

Meanwhile the Australian market was a tale of two entities yesterday – BHP Billiton ((BHP)) and everybody else. Shareholders jeered at the Big Australian and shook their heads in disbelief after the company confirmed demerger intentions at Tuesday’s result release. Investors have been waiting for a good two years to see their patience repaid ever since the company reeled in its ambitious growth plans, yet were again left high and dry with no dividend sweeteners and no share buyback.

Analysts had warned a buyback was not a given this time around, but no one saw the demerger coming. By demerging, and not selling, non-core assets, BHP ensures shareholders miss out on any potential capital return unless they join the masses in trying to offload their BHP Rump shares into the market. After further investor assessment, BHP Billiton shares fell 4% yesterday, sending the materials sector down 2% when almost all other sectors closed in the green.

Interestingly, last night saw a big jump in base metal prices in London. LME traders are the masters of the day’s delay, given there is only a small trading window between New York opening, at which point economic data releases are made, and the LME close. Last night traders responded to Tuesday night’s US housing starts data, which saw a 15.7% surge in July after a weak June. This, and summer-thin volumes, and the expectation Janet Yellen will confirm the Fed’s dovish stance on interest rate policy on Friday night at Jackson Hole, drove aluminium up 2%, nickel up 1.5% and lead and zinc up 1%. And having wallowed for some time below the psychological US$7000/t mark, copper smashed through that level with a 2.2% gain.

Then the LME closed, and shortly afterward the minutes of the last Fed meeting were released. And, shock horror, many saw those minutes as more hawkish than was otherwise anticipated. “Slack” in the US labour market has been Yellen’s latest mantra, and excuse for not moving swiftly on rates. But the minutes noted the committee’s surprise at just how quickly the labour market is recovering, and many members suggested the “significant slack in the labour market” call might have to change sooner rather than later.

Wall Street was knocked for a six. The Dow was up around 50 points just before the release, and almost square again minutes later. But, as often is the case on the release of Fed statements/minutes, the market just as quickly swung back again. If the labour market is improving, surely that’s a good thing?

Or perhaps, as commentators suggested, Wall Street was ready to dismiss those minutes and wait to hear what Yellen has to say on Friday night. And volumes on the NYSE are also summer-thin, so it was suggested the stock market “fell into an upward hole” towards the death. Furthermore, as I have noted time and again, the “smart money” never responds on the day of major Fed releases. It takes the document home for more careful assessment, sleeps on it, and saves its more measured response for the next day.

So, all things being equal, we’ll have to wait and see what Wall Street does tonight. But then Yellen will speak the next night, as will Mario Draghi, so perhaps best to keep it tight.

The forex cowboys weren’t keeping it tight last night, nonetheless. The US dollar has been coming under a bit of upward pressure these past few sessions and last night saw quite a blow-off, with a 0.5% rise in the dollar index to 82.25. I can’t remember the last time I reported a Dixie move of as much as 0.5%. The good news for us, of course, is that the Aussie is down another 0.2% to US$0.9287.

Bring it on!

The US ten-year yield also rose again last night, adding another 2 basis points to 2.42%.

Base metal traders might be encouraged by rising US housing starts, but it’s too long a bow to draw to see a flow-through to Chinese steelmaking and thus iron ore prices. Iron ore is down another US70c to US$92.30/t.

The weekly US oil inventory data chocolate wheel this week spun up a drop in supplies, hence there was a last hurrah flourish for the expiring West Texas contract. We’ll take the new October contract as the indicator thanks, which rose US64c to US$93.50/bbl. Brent rose US68c to US$102.30/bbl.

With the ASX200 having been hamstrung by the Big Disappointer yesterday, the SPI Overnight is up 19 points or 0.4%.

It’s flash day today, with August manufacturing estimates due out of China (HSBC), Japan, the eurozone and US. The US will also see existing home sales and the Philly Fed manufacturing index tonight.

The Jackson Hole symposium begins tonight, although it's tomorrow night when the headline acts are wheeled out.

Today sees another avalanche of earnings result releases in the local market. Highlights today include Asciano ((AIO)), AMP ((AMP)), ASX ((ASX)), Alumina ((AWC)), Mirvac ((MGR)), Origin Energy ((ORG)) and Tatts ((TTS)), just to name a few. Treasury Wine Estate’s ((TWE)) result will allow the rest of us to see just what KKR has been duly diligent in perusing this past week.

 

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