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• Investors shrug off fundamentals and play the excess pessimism/ Fed card.
• Aussie may receive tail winds regardless of the Fed conditions.
• The local data vacuum leaves interest rate strategists guessing.

It’s been a week of contradictions and investors in the US seem fine with taking on extra risk despite a fundamentals-challenged stock market and an economy which sometimes resembles a Keynesian experiment. It’s currently a sentiment driven market with economic data in the US looking soft and barely resembling the “fits and starts” of growth that we’ve seen in recent weeks. MBA Mortgage Applications were down (-1.4%), Initial Jobless Claims increased (465K) and there was stagnant New Home Sales growth (0%). Consumer Confidence (48.5) and the Richmond Fed Manufacturing Index (-2) were both hammered lower, while Leading Indicators (0.3%) improved. Durable Goods Orders ex Autos (2.0%) and Existing Home Sales (7.6%) were also redeeming features however both were working off low bases to begin with. These rather poor macro pieces would usually be cause for concern, however the S&P500 has put on weight to the tune of 0.73% as traders focus on speculation regarding further Fed Quantitative Easing. With such poor macro’s, the Fed may not have a choice but build on the particularly accommodative setting for bond prices and as a result investors are aligning this with inflationary pressures. These assumptions are despite the record of Ben Bernanke, who has provided few definitive insights on launching QEII while also previously alluding to the questionable effectiveness of further quantitative easing given the lack of lending after QEI in March 2009. Not only have we had the usual, equity market gain-USD loss contradiction but we’ve also seen investors shrug off the macro data and align their trading strategy to both the assumption of QEII and the impact it may have on inflation.

Regardless of the above QE scenario, the AUD is in a strong position as the likelihood of a double dip recession in the US is slowly being taken off the table. This is providing equity markets with just enough risk appetite to allow the comparative AUS-US economic fundamentals to be capitalised on by the AUD due to the malaise in the US economy. The moderate growth in equities may just continue as investors refer to stronger earnings and lower bond yields for the reason for optimism. The downside risk however is that this fails to recognise the weaker prospects for company revenues going forward should low US consumer confidence and impotent employment growth continue.

The stellar highs for the local unit this week of 97 US cents have come off the back of the US equity market results and quantitative easing speculation rather than from data releases locally. The data releases have been minor with Wednesday’s improved Conference Board Leading Index (0.8%) the most important release. All eyes are on the RBA for Tuesday’s rate decision and a rate hike will only compound the stellar gains it’s had off the back of the interest rate sentiment in the US. Governor Steven’s is a patient man and unless he considers Thursday’s housing, private sector credit and manufacturing index data to be particularly strong, then the patient governor is likely to hold off for another month. Currently, based on interest rate futures, the probability of a rate hike is 64%.

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