Daily finance news for Australia

Well there was no surprise by the Fed’s decision to keep rates unchanged
(between 0-0.25% and for an extended period) nor in its decision to
maintain Qe2 to the June quarter, despite the market view, and fact, that
it has been a failure. Remember that the stated aim was to lower long-end
yields, while in fact they have risen substantially (failure by any
definition).  I am surprised that no one on the new Fed committee thought
it wise to dissent, Hoeing was the man last year, unfortunately he is no
longer on the committee but other hawks are on it – yet nothing from them.
Perhaps they were shouted down by the doves though, I mean the press
release mentions the Fed’s ‘statutory mandate’ no less than 4 times.

In terms of the Fed’s economic assessment, nothing has really changed
although they are perhaps slightly more optimistic, noting that ‘growth in
household consumption picked up’. Overall they note that the recovery is
continuing, but as expected, suggest this is insufficient to bring about a
significant improvement in the labour market. As I’ve pointed out before,
this is a blatantly false statement and stands in stark contrast to the
facts – employment is a lagging indicator.

The Fed states that firms are reluctant to add to payrolls, overlooking the
1.3m private sector jobs that were created over the last year. For this
stage of the cycle that is a remarkable outcome. It’s been 5 quarters since
the last negative GDP print, 5 quarters into the recovery. At a similar
stage during the last recession/downturn almost 1m jobs had been lost, not
created. The Fed still doesn’t seem to understand that the high
unemployment rate (now and in the future), resulted from the magnitude of
job losses during the recession. It’s not the speed of the current recovery
that is the problem, this is a robust recovery. It’s just that so many jobs
were lost during the recession. It’s virtually impossible to get the
unemployment rate down any faster. The labour market needs time. On prices,
the Fed noted the increase in commodity pries but said that inflation
expectations remain stable and that underlying inflation has been trending
down.

Price action, noting there was a little volatile in the Treasury and FX
market around the announcement, was reasonable. With about an hour to go,
yields on the major t.notes are higher – 2bp on the 2yr (0.63%), 3bp on the
5yr (1.99%) and 8bp on the 10yr (all from 1630 yesterday). Aussie futures
bounced around on a 4-5 tick range and are currently about 3-4 ticks lower
(3s at 94.85 and 10s at 94.41).

In FX land, AUD is down 34pips (0.9951), Euro is down 11pips (1.3679) and
GBP is up 45pips (1.5876), the relative outperformance there having
something to do with the BoE’s minutes out last night.

While the Fed’s decision may not have shocked, the BoE’s minutes to their
Jan12-13 meeting seems to have caused a bit of a stir (gilts were down
sharply).  The reason, is that one more Committee member decided that the
best course of action was to hike rates. So that’s two to hike so far and
others suggested the decision to leaves rates at 0.5% was finely balanced.
Posen (who still wants to print more money) and King were no doubt sitting
there, shaking their heads, and now probably (and incorrectly) point to the
Q4 GDP print (released the previous night) to justify their stance.  GDP
fell by 0.5% and that’s got some people spooked, sure.  Yet the Stats
office suggests that by itself, the snow storms (Dec) took of 0.5%pts from
growth. Yet low prints around 0-0.3% aren’t unheard of during a robust
recovery.  One soft print, following 4 consecutive quarters of solid growth
and with inflation well above target, certainly doesn’t justify a zero
interest rate policy and QE.  I can appreciate that the Q4 GDP print,
occurring at such an early stage of the recovery may not justify
restrictive rates – but no one is talking about restrictive rates.

Back to the price action, equities had a reasonable session, quite a solid
one in Europe, with the major indices up 0.9% to 1%. In the US, the S&P500
is currently up 0.6% (1298.1) with basic materials and energy stocks the
main leaders, following a 1.4% spike in copper, a 1.4% bounce in crude
($87.38) and a $7 lift in gold ($1341). Elsewhere, the Dow was 27pts higher
at 12008, the Nasdaq rose 0.9% (2743), while the SPI was 0.7% higher
(4798).

A few things otherwise. The RBNZ kept rates on hold as expected (3%) and
maintained a predictably dovish stance. They did note that recent
indicators had firmed, but suggested that rates would remain low until
there were more obvious signs of a robust recovery and increase in
underlying inflation. In Germany, import prices rose at their fastest pace
in almost 30yrs (12%y/y to Dec and 2%m/m). Otherwise in the US, new home
sales surged 17% in Dec (well above mkt forecasts of 3.5%), although
mortgage applications fell 13% in the week to January 21 after a 5%
increase the week before.

Looking to the day ahead, we get Westpac’s leading index at 1030 but that’s
pretty much it. Tonight watch out for the EC business climate indicator, US
durable goods, initial jobless claims and pending home sales.

That’s the lot, hope you have a good day…

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