The Overnight Report: Fed Remains On Message
By Greg Peel
The Dow closed down 21 points or 0.1% while the S&P was again flat at 1685 as the Nasdaq rose 0.3%.
The Australian market rather confounded yesterday by exploding out of the blocks, sending the ASX 200 up 40 points. It was a bit of a wake-up after two weeks of somnolence and the best explanation seemed to be the now 99% expectation of an RBA rate cut next week. If this is the case it was a delayed reaction, given the market did not move on Tuesday after Stevens made his speech. A big order from someone who was asleep at the time?
Either way it didn't last, and the current order was restored. With the US GDP and Fed statement due last night, and the Australian earnings season in its infancy, a square-up seemed sensible and we closed a more familiar 4 points higher.
It was then the turn of Wall Street to shoot higher, jumping 114 Dow points on the release of ADP jobs numbers for July and the June quarter GDP result. The ADP showed 200,000 private sector jobs were added against 170,000 expectation. The GDP came in at 1.7% when consensus was for only a 1.0% gain. Woohoo!
But wait. Look a little closer. The March quarter result, previously declared as 1.8% growth after three goes at the calculation, was revised down to only 1.1%. Every now and again, the government adjusts its GDP calculation metric to account for a changing economy. This revision represented the impact of the latest tweak. But by the same token, the 2012 figure of 2.2% was revised up to 2.8%.
It is thus of little surprise that the afternoon's Fed statement included an effective downgrade of the central bank's assessment of US economic growth to "modest" from "moderate". The economy grew by 2.8% in 2012 and by only an average 1.4% in the first half of 2013. Wall Street has long anticipated a stronger second half, which is likely why expectations of Fed tapering before year-end have not altered. According to one survey, 66% of economists expect tapering to begin in September, 25% suggest October and 10% think December. Presumably there's a little bit of rounding involved, given that equals 101%. The survey also appears to leave no room for anyone expecting tapering to be delayed until 2014.
Note also that FOMC meetings are held every six weeks, not every month (take note ABC News). Hence there is no meeting in November.
There was no actual mention of tapering in the Fed statement, which was no real surprise. All tapering talk has come from Bernanke and the other Fedheads outside the FOMC meeting room. The statement did suggest the central bank was concerned with a level of inflation below 2%, but a belief that a 2% level can be soon regained. In the end, the statement arguably had something for everyone, and nothing for everyone. Having traded back to the flatline before the release, the Dow bounced up 70-odd points again.
And then the sellers came in. Despite the weaker close, and some weaker closes these past few sessions, the month of July has seen a performance in 2013 second only to January. A few profits were likely taken for books-close at the death.
The US ten-year bond yield also had a volatile session, but in the end fell by one basis point to 2.59%, little changed for some time. The US dollar index slipped 0.2% to 81.65 and on the strength of RBA rate cut expectations, the Aussie now has an eight in front of it. Over 24 hours it's down 0.8% to US$0.8988. Gold is slightly lower at US$1324.20/oz.
There is a bit of a skittish bunch over on the LME. Tuesday night saw selling in a summer-thin market, supposedly due to nervousness ahead of last night's US releases and today's Chinese PMI. But last night ? the last session of the month ? saw equivalent buying, supposedly based on the strong US GDP or at the very least on book-squaring. Aluminium rose 1%, copper, lead and nickel 2% and tin 3%. The LME closed ahead of the Fed statement.
One feature of the GDP number was a strong result for US exports, and in this new era that means oil along with other products. The pipeline reversal which has unblocked the Cushing bottleneck means Canadian oil and US shale oil can now be pumped to the Gulf coast for refinery and export. West Texas crude jumped US$2.12 to US$105.20/bbl last night, while Brent rose US79c to US$107.70/bbl.
The news on the iron ore front yesterday was that India's mines ministry is lobbying the finance ministry for a cut in the country's iron ore export duty, given falling shipments. The result was a US$1.00 fall in the China spot iron ore price to US$129.90/t.
The SPI Overnight rose 2 points.
It's PMI day today, with manufacturing numbers due from Australia, China, the eurozone, UK and US. Tonight both the ECB and Bank of England hold policy meetings.
Transurban ((TCL)) will report its full year result.
Rudi will appear on Sky Business at noon and again on Switzer TV between 7-8pm.