By Greg Peel

The Dow closed up 198 points or 1.1% while the S&P rose 1.2% to 2090 and the Nasdaq rallied 1.3%.

Cup Favourite?

The tenor of the minutes of the RBA’s October policy meeting was one of a board reasonably satisfied with the progress of Australia’s difficult economic transition, and happy that both the currency had come down to more realistic levels and that regulatory tightening had resulted in an easing in the housing bubble. The assumption one could make from those minutes is that the RBA is not going to cut its rate next week, nor even in December.

But since then we’ve seen the major banks reprice their mortgage rates, affecting a tightening of monetary policy for Australian households without the RBA’s involvement. This act of blind treachery, as the populist media and politicians have effectively labelled it, will now force the RBA to cut next week, most have suggested.

Why?

Mortgage repricing directly addresses the RBA’s concerns. The central bank was this month relatively happy with how things are progressing, but still concerned about the housing bubble. Now it doesn’t need to be concerned.

And then along came yesterday’s September quarter CPI result. The headline number came in at 0.5% quarter on quarter growth, missing economist consensus of 0.7%, for a 1.5% annual rate. There you have it, said all and sundry – now the RBA will cut rates on Tuesday. The CPI is well below the 2-3% comfort zone.

Except that it isn’t. One can say it until one is blue in the face but no one ever seems to listen. The RBA’s comfort zone is based on core inflation, ex-food & energy, as represented by the trimmed mean, not on the headline number. This measure rose only 0.3% in the quarter but is up 2.2% year on year – smack bang inside the comfort zone.

What dragged down the September headline CPI? Falls in food and energy prices.

So will the RBA cut on Tuesday? Not everyone is on that bandwagon.

The forex market is clearly backing a Cup Day cut. The Aussie is down a cent over 24 hours to US$0.7096. It was a game played in two halves. First came the weak CPI number and then came the latest Fed statement and a subsequent US dollar rally overnight.

The stock market also backed a rate cut yesterday, despite another soggy but immaterial close. Three sectors finished one percent or more in the green to balance out general sogginess elsewhere. They were healthcare, utilities and telcos. Defensives and yielders. Most of the offset came from falls in the resource sectors yet again.

How to paint oneself into a corner

All through 2015, Fed policy statements have declared that the FOMC “would determine how long” to keep its rate at zero, without ever putting a timeframe on it. Last night’s statement declared the FOMC would determine “whether it will be appropriate to raise the target range at its next meeting”. It is the first time a specific meeting has ever been referred to officially, despite Janet Yellen constantly repeating that a rate hike this year looks likely.

As for “appropriate”, the statement declared the FOMC would assess the progress, “both realised and expected”, towards its dual objectives of maximum employment and 2% inflation. In other words, neither goal actually has to be achieved, it just has to appear as if both are on track to be achieved.

Throw in an apparent easing of concerns from the Fed over global markets and Wall Street has now lifted the odds of a December rate hike to 50% from 30% beforehand.

But how does Wall Street react to this turn of events? That’s the hard part.

We recall that all year commentators were warning that the first Fed rate hike would trigger a correction on Wall Street. We didn’t get a rate hike in June when it was expected, but we had the correction anyway, thanks to China. Then everyone expected a rate hike in September, but it was not to be, thanks to China.

So Wall Street sold off, which seemed counterintuitive on the assumption it would be a rate hike, not lack thereof, that would spark a sell-off. Wall Street sold off because of the uncertainty the Fed was perpetuating. The market really just wanted to get a rate hike out of the way.

Then came two surprisingly weak US jobs reports in succession. Following the September report, Wall Street decided there was not going to be a rate hike in 2015. Thus uncertainty evaporated, and hence it was time to start buying stocks again.

However, last night’s statement suggested December is still goer. So what did Wall Street do? The Dow was up a hundred points ahead of the Fed release, largely due to the well-received earnings result from Apple. On release, the Dow fell back into the negative, driven by computers. Immediately it bounced and rallied two hundred points. Computer programmers were left scratching their heads.

Wall Street has just seen a 10% rally from the correction lows because it seemed there would be no rate cut in December. Now that it seems there will be, surely that must be negative? At least that’s what the computers assumed.

The bottom line is Wall Street is now split into two camps. One camp suggests the Fed now feels it should have raised in June, and, in retrospect, could have raised in September, so to end the criticism of its indecision and to end uncertainty it simply has to raise in December. Last night’s statement all but confirmed this.

The other camp believes the Fed won’t raise in December, and will likely wait until at least March. The Fed needs to be satisfied its two goals of employment and inflation are close to being achieved. We’ve seen two shocking jobs reports in a row. Inflation, thanks to the stronger greenback, is more likely to fall than rise into the end of the year. Ergo, by the Fed’s own measure, there will be no rate rise in December.

The confusing point is that we could put the 200 point Dow rally down to either camp’s view being right. A December rate rise would end uncertainty, so that’s positive. No December rate rise means stocks remain the only place to invest, so that’s positive.

We can, nevertheless, look to other markets to gauge Wall Street sentiment. The US dollar index is up 0.8% to 97.66. That says December rate rise. The US ten-year bond yield rose 6 basis points to 2.09%. That says December rate rise. But then, the Fed futures market is pricing December at 50/50.

And that about sums it up.

Commodities

The LME is always closing just ahead of Fed releases so while base metal prices saw small falls last night, we’ll need to wait until tonight to see a Fed response.

The iron ore market doesn’t really pay much attention to outside influences, so its fall of US$1.30 last night to US$49.50/t likely has nothing to do with the Fed.

On the strength in the US dollar, and on an increase in US weekly inventories, we would expect the oils to have gone the same way as iron ore. But no, West Texas is up 6.3% or US$2.73 to US$45.95/bbl and Brent is up 4.6% or US$2.17 to US$49.03/bbl.

The suggestion is that when WTI fell through 45, the market got itself very short on the assumption this break-down from the range meant the next stop would be in the thirties, rapidly. While WTI has been a little weaker this week, it has not been dramatically weak. Thus, someone decided to cover their shorts last night and suddenly the scramble was on.

And now we’re back inside the 45-50 WTI range once more.

Gold is saying December rate hike. It’s down US$10.20 to US$1156.30/oz.

Today

The SPI Overnight closed up 42 points. Somewhere in that number will be allowance for an expected bounce-back for the energy sector but likely weakness for the materials sector.

Locally we’ll see new home sales data today, and tonight we’ll see the first estimate of US September quarter GDP, just to add fuel to the fire.

ANZ Bank ((ANZ)) will report full-year earnings today and Woolworths ((WOW)) will report September quarter sales amidst another busy round of AGMs and production reports.

Rudi will make his weekly appearance on Sky Business' Lunch Money today, noon-1pm.

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By Greg Peel

The Dow closed down 41 points or 0.2% while the S&P lost 0.3% to 2065 and the Nasdaq fell 0.1%.

Flat

As trading sessions go, yesterday’s action on Bridge Street could not have been much flatter on a net basis, with the index managing only to flip-flop around the flatline all day. On a sector basis the story was nevertheless a little different.

It was not that long ago WTI crude looked set to break out of its long running US$45-50/bbl range to the topside on a falling US rig count and geopolitical rumblings, but this week WTI has broken down through the bottom of the range on a combination of US dollar strength and realisation that lower rig count or not, the world remains oversupplied vis a vis restrained demand.

Yesterday the local energy sector fell 2.3% on weaker oil prices. Daily oil price fluctuations still override a sector now clearly into a consolidation phase, although the M&A game will take a while to play out just yet. At the same time, the iron ore price is threatening to fall through US$50/t once more, weighing on the materials sector. It was down 1.2% yesterday.

With the banks going nowhere yesterday thanks to National Bank’s intriguing trading halt ahead of its profit result this morning, now assumed to relate to a sale within its insurance business, it was left to healthcare (+1.2%) to provide most of the offset. The consumer sectors have also become more popular of late, and they also added some green to the screen to ensure a net flat close for the ASX200.

There are two significant events to consider over the next 24 hours, being today’s release of Australia’s September quarter inflation numbers and their potential influence on the RBA ahead of Tuesday’s meeting, and tonight’s Fed statement and any potential clues it may provide about a December rate hike.

We could also throw in the possibility of the Bank of Japan scaling up the global “race to the bottom” among central banks in boosting QE to counter fresh ECB QE and further PBoC rate cuts as reason to wait on the sidelines this week.

Apple to Fall

Wall Street is clearly awaiting central bank updates as well but last night was also in a quiet mood ahead of the aftermarket release of Apple’s September quarter earnings.

Apple, America’s biggest company and a recent addition to the Dow Jones Industrial Average, has become an economic bellwether for Wall Street as the “new world” leader. Sales of iPhones in the US will provide a gauge of consumer demand, so important to the US economy, and sales in China will add colour to the picture of a China slowdown and the country’s shift towards domestic consumption.

As I write, Apple shares are struggling to rally 2% post release on strong Chinese sales and a beat on revenue, which is a rare achievement in post-GFC America.

Twitter is another new world company reporting this morning, after the close of Wall Street, and also closely watched despite many believing it is no longer a social media platform but merely a news service, destined never to monetise its popularity. Not a good result there, given Twitter shares are currently down 10% in the aftermarket.

Oil prices were again weaker overnight which weighed on the US energy sector. With Wall Street on Fed-Watch, there was also a raft of US economic data to consider.

Durable goods orders fell 1.2% in September, having fallen 3.0% in August. Stripping out lumpy auto/aircraft orders left a 0.4% fall, with the strong US dollar being blamed for falling orders offshore for US-manufactured goods.

The Conference Board’s monthly index of consumer confidence came in at 97.6, down from 102.6 in September, when economists had expected 102.1. September was the best result since January so the dip is not too onerous, but the world’s biggest consumer economy would be better served by rising confidence going into the “Holiday Season”, as it is known.

There was improvement in the Richmond Fed activity index, which rose to minus 1 from minus 5 last month when economists had forecast minus 3. Still contraction though.

The better news was Case-Shiller’s 20-city house price index, which rose 4.7% in August having risen 4.6% in July.  Year on year, prices were up 5.1% in August compared to 4.9% in July, supporting decade-high strength in NAHB’s housing market sentiment index this month.

All up, however, there is nothing here to suggest the Fed is destined to pull the trigger in December. Maybe tonight will provide more clues.

Commodities

Iron ore closed unchanged overnight at US$50.80/t, marking the end of a consecutive ten-day run of falls.

The LME was deathly quiet ahead of this week’s central bank posturing. Base metal price moves were small and mixed.

As noted, the oils fell again. West Texas dropped US57c to US$43.22/bbl and Brent fell US46c to US$46.86/bbl.

I noted yesterday a sudden 9% plunge in the US domestic natural gas price to US$2.08/mmbtu. Last night the price stabilised at US$2.10.

The US dollar index is up a tick to 96.91 while gold managed at US$3.30 gain to US$1166.50/oz. Weaker commodity prices appear otherwise to be weighing on the Aussie, which is down 0.7% to US$0.7197.

Today

The SPI Overnight closed down 20 points or 0.4%.

Australia’s September quarter CPI numbers are out today. Economists are looking for 1.7% annual on the headline.

The Fed’s latest policy statement is due tonight.

Locally it’s another very busy day for AGMs but all eyes will be on National Bank’s ((NAB)) full-year earnings report, due this morning.

Rudi will host Your Money, Your Call Equities tonight, 8-9.30pm, on Sky Business.

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By Greg Peel

The Dow closed down 23 points or 0.1% while the S&P lost 0.2% to 2071 and the Nasdaq was flat.

Ineffective?

Yesterday morning the futures were calling the ASX200 up 55 points which, if accurate, would have put the index above 5400 for the first time since August. Anticipation centred around the market’s response to Friday night’s Chinese rate cuts.

But those rate cuts had themselves been long anticipated so when the ASX200 opened up 33 points from the bell yesterday and immediately struggled, it became clear 5400 is a bridge too far just yet. There was most likely an element of “sell the fact” from shorter term traders after a strong rebound from near 4900 to near 5400.

However, there is also consternation around the latest Chinese stimulus package in that its potential effectiveness has been questioned. The PBoC lowered its official deposit and lending rates by 25 basis points but also “liberalised” deposit rates for the first time, meaning Chinese banks can now offer whatever rate they like to lure capital. If deposit competition heats up among China’s banks, the trade-off is a lack of capacity to lower lending rates less net interest margins become too compressed.

In other words, in Australia-speak we would say the banks may not “pass on” the central bank rate cut.

The other element is that of the 50 basis point cut to China’s bank reserve ratio requirement (RRR), allowing banks to free up more balance sheet capital for lending. China’s net debt has already climbed alarmingly since the first big stimulus package of late 2008 and another cut to the RRR only fuels that fire. Moreover, economists suggest that the amount of capital that has flowed out of China recently due to the economic slowdown will not be completely offset by the capital release permitted by the RRR cut.

So all up it’s possible the PBoC has delivered the stimulus you have when you’re not having any stimulus. There was not a great deal of excitement on the Shanghai exchange yesterday, with the Chinese index closing only 0.5% higher. It did not help the mood that yesterday the Chinese premier acknowledged that the government’s 7.0% growth forecast for 2015 is not a hard target and indeed may not be met.

The only real stand-out on the Australian market yesterday was a 1% fall for telcos. Otherwise most sectors closed flattish.

For Australia the next major event will be the release of September quarter CPI data on Wednesday, which may or may not provide further fodder for the argument among economists a Cup Day rate cut is worth backing next week.

Then on Wednesday night, the Fed delivers its latest monetary policy statement.

Gas Leak

Not that anyone expects a rate rise, and not that there’s any great expectation of a shift in the Fed’s rhetoric. The world remains in the dark. But an approaching Fed meeting typically gives cause for Wall Street to quieten down for a couple of days, and that seems to be what happened last night following two days of solid gains.

The US indices meandered their way to a dull close. The big jumps on Thursday and Friday have meant the S&P500 is close to recovering all of the big August plunge. For months the index wandered along a straight line with 2100 at its centre before Wall Street woke up to the China scare. It is now back at 2071, thanks to help from the ECB and PBoC, and we’re likely back at a “where to now” point. The US earnings season, still ongoing, will no doubt have some say. There is much anticipation ahead of reports from Apple and Twitter tonight.

There were nevertheless two main talking points of the day.

The first was an 11.5% plunge in US new home sales in September. While this looks alarming, Wall Street is not ready to panic given this data series is highly volatile and carries a margin of error of 11.3%. The fall in new home sales is also offset by a big rise in existing home sales in the month, balancing out home sales in general.

Interestingly, there is a trend emerging in the US that younger home buyers are eschewing their parents’ dream of a house in the suburbs in preference for an apartment in the city. They are also more likely to rent than borrow and buy. The concern now, as new home sale numbers ease, that too many apartment blocks have been built.

Sound familiar?

The other talking point last night was the natural gas price. The price of US natgas as measured by the Henry Hub futures contract had barely moved all year, hanging around US$2.50/mmbtu for months, until recently. Indeed, but for a couple of runs higher in the interim natgas has not really changed in price since the oil price first collapsed in 2008.

But in the last few days the price had begun to slide, and last night it fell 9% to US$2.08. The story is the same as it is for oil – too much gas is being supplied vis a vis demand, with a warm autumn in the US not helping. This is a US domestic price and natgas is a closed shop commodity in the US. But the government has been quietly moving towards allowing export of US gas, in the form of LNG.

Which is not good news for Australia’s upsized LNG export industry, albeit this is an issue well known for some time. At least Australia’s major LNG projects are coming on line years ahead of US projects now underway. There remains the question of to what extent the US might become an exporter of energy. The Obama government has been reticent, the Republicans, unsurprisingly, are all for it. A change of government next year would be material.

The Republicans are all for it because they are free market supporters and, let’s face it, count among their number the country’s oil barons (See: Bush family). The Democrats are reticent because for so many years the US was beholden to energy supply from its enemies, and now it isn’t. Cheap energy also provides the US economy with a competitive advantage over the energy importer economies of China, Japan and Europe. Why hand away that advantage in exchange for a small margin on energy export?

Watch this space.

In the short term, US gas producing companies had a tough time on the stock market last night.

Commodities

Natgas was the talking point but West Texas crude is also now back on the slide, having threatened to break up through US$50/bbl only a couple of weeks ago. If the Chinese premier is suggesting his 7% growth target is unlikely to be met than China’s economy is probably in a worse state than official Chinese data portray. WTI fell US78c to US$43.79/bbl last night having previously slipped through the low end of the established range at US$45/bbl.

Brent fell US62c to US$47.32/bbl.

Oversupply continues to be a global issue for aluminium, which last night fell 1.4% on the LME. Copper was the only base metal to hold relatively steady as the others drifted lower.

Iron ore fell another US10c to US$50.80/t.

Gold is relatively steady at US$1163.20/oz.

After two solid sessions of gains, the US dollar index has fallen back 0.3% to 96.83. The Aussie didn’t move an inch during that rally, given the offset on the cross-rates and most particularly the euro. But on last night’s US dollar fall, the Aussie is up 0.4% at US$0.7246.

Today

The SPI Overnight closed up 3 points.

China will report industrial profits for September today. The UK will provide a first estimate of September quarter GDP tonight.

The US will see a raft of data tonight including durable goods, consumer confidence and house prices.

Locally, the AGM calendar is rather stretched today, and another load of resource sector production reports are also due. Medibank Private ((MPL)) will hold an investor day.
 

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