httpvh://www.youtube.com/watch?v=eBWDwZ1YKbs
Economic matadors tame Wall Street bulls.
• Equities play catch-up with economic reality.
• Bernanke to keep QE3 on the shelf despite a “loss of momentum”.
• Local progress meek, though AUDUSD remains resilient.
Wall Street has taken a hit this week as the prospect of earnings targets being missed becomes more likely due to an impotent recovery. Economic conditions look to be stalled in the US and with few people added to payrolls, this increases the risk of a long-term recovery with high underemployment. With the recent earnings season now but a memory, Wall Street took note of the macro news and sold off heavily over the week (S&P500 -2.69%). The offending data included Factory Orders (-1.2%), Nonfarm Payrolls (54K) and Mortgage Applications (-0.4%), which all raised the ire of policy makers and increased speculation about their ‘next steps’.
Fed Reserve Chairman Ben Bernanke didn’t signal a desire to establish a third round of extraordinary economic stimulus and will soon end the US$600 billion purchase of securities that suppressed broader interest rates. Bernanke mentioned that the recovery is “frustratingly slow” and that “accommodative monetary policies are still needed” however a third round of quantitative easing was not identified as part of his recovery plans. Due to the dovish commentary and lack of further QE stimulus, equity markets fell as lower borrowing rates would have benefitted companies, albeit at the risk of value-eroding inflation.
Without a strong lead locally and soft equity markets, the local unit had the capacity to soften significantly, however remained resilient against the USD. The local data was mixed, however of particular note were the underperforming Performance of Services Index (49.9) and Job Advertisements (-6.5%), both supporting the RBA’s decision to keep interest rates on hold this week. The accompanying statement by Governor Stevens wasn’t particularly hawkish noting that “terms of trade are reaching very high levels and national income has been growing strongly” however that there is a “degree of caution in spending and borrowing”. Data that may force the Governor’s hand in coming months included Retail Sales (1.1%), Home Loans (4.8%) and the Performance of Construction Index (39.6). Although the Aussie-Greenback remains firm, the Aussie-Eur and Aussie-GBP crosses softened as our comparative inflationary pressures looked slightly less acute.
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