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• QE II back in play amidst poor US data.
• Bulls trampling equity market matadors.
• Local data mixed yet positive for growth.

The foreign exchange market and the higher yielding currencies in particular have been reassurance that QEII is now destined to set sail amidst the uninspired economic climate in the US. This was highlighted both by negative jobs growth in the US as per Friday night’s non-Farm Payroll figure (-54K) and the rhetoric out of the Fed which has been firmer than usual this week. The likelihood of quantitative easing is now widely considered a matter of when not if, after last month’s meeting minutes were released. The minutes stated that FOMC members felt that “such [monetary] accommodation may be appropriate before long”. This had the affect of providing a mild boost to equities with the S&P500, a key barometer for risk, putting on 0.77% of weight (2.48% for the month to date).

The continuing rally for equities is the equivalent of market bulls tossing equities higher while trampling the macroeconomic data that regularly provides insights into an economy in dire straits. The proposed quantitative easing suppresses bond yields in an effort to boost economic growth, however currently, rather than boosting growth it’s now required as a pre-requisite to simply stifle a 2nd recession and/or the prospect of disinflation and a projected malaise for the US economy. Despite the data, investors are still jumping into US equities, including Warren Buffett who said in mid-September that he is “a huge bull on this country”. Since then economists, including Princeton Professor Paul Krugman, have pushed the case for significant fiscal stimulus with the current round of stimulus set to expire in December this year. Krugman argues that the prospect of greater debt in the US is unappealing yet the lesser of two evils given the current prospect of a medium term period of moderate economic growth and high unemployment.

Locally, the data has been a mixed bag yet broadly speaking positive for the Aussie. There was below expectation figures for Home Loans (1.0%), NAB Business Confidence (10) and the AiG Performance of Construction Index (40.8). With an impressive Employment Change figure (49.5K) however, caution was thrown to the wind. Importantly, Westpac Consumer Confidence (3.3%) also bounced back which highlighted a narrow growth story as the resources sector performed while there was a softening in both retail and manufacturing. The current conditions for the AUD and the speculation of just how high the currency may go are provided by the headwinds the USD is facing via QEII however the above tail winds are providing a key level of support for the local unit. Should the Fed, launch QEII in the near term, there will be the conditions required for a particularly strong AUD.

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