It’s amazing how a better than expected poor profit result change sentiment,, helped by a $US4 a drop in the price of oil, and a few other odds and sods.
Suddenly the gloom of yesterday isn’t there and Wall Street has its biggest day in three months: the Dow and S& P 500 up more than 3% and Nasdaq up over 3%. Oil down to just over $US136 a barrel and other commodity prices weaker, which is the underlying bad news for our market.
Dead cat bounce? We’ve seen a few of them this year, especially from March to May.
But that aside, our punters reckon the market will be up 1.2% at the opening today after yesterday’s surprise rally off the back of investors rediscovering the banks.
BHP Billiton’s bid for Rio Tinto is looking weak after Rio’s better than expected 2nd quarter and first half production figures: especially the solid rise of 14% in iron ore output.
It means a solid profit rise for the miner when it reports its interim result next month. Next week we’re expecting BHP’s 4th quarter and 2008 production figures; they should make interesting reading.
But with Fed chairman, Ben Bernanke back on Capitol Hill still gloomy, but reassuring on those problem kids, Freddie Mac and Fannie Mae, American investors turned a blind eye to the day’s big surprise.
That was a surge in US consumer price inflation in June: it hit an annual rate of 5% after a bigger than expected rise in the month, and the core reading edged higher as well top the 3% mark.
Like Australia’s Reserve Bank, which has made it clear there won’t be a rate rise after our June quarter CPI comes in with a 4% plus reading next week, the US Federal Reserve Chairman has indicated the Fed won’t react to high readings for inflation in the US for the immediate future.
They will wait and allow the sluggish economy and falling demand to bring prices down.
That’s why there was a muted reaction to what seems to have been a big CPI number in every meaning of the word.
US consumer prices rose by 1.1% in June, recording their biggest monthly jump since Hurricane Katrina in 2005, driven higher by food and energy costs.
The increase was well above the market forecast of a 0.7% rise. On a core basis, prices rose 0.3%, compared to the forecast 0.2%.
The sharp increase in monthly inflation was the biggest since September 2005 and the second biggest since June 1982 – highlighting the difficult balancing act that is being performed by the Fed and outlined this week in Congress.
It knows inflation is an upside risk: Mr Bernanke told the Senate that yesterday; while the risks are on the downside are from the sluggish economy, rising unemployment and the fragile confidence in the markets.
A rate hike would undermine that confidence and put further downward pressure on growth and on the depressed housing sector which remains the seat of the all the problems in the US.
US bond yields rose sharply in reaction to the inflation news; with the 10 year yield hitting 3.93%, up around 0.12% in a day.
That 1.1% rise in the headline inflation rate was a sharp acceleration from the 0.6% increase in May, and was driven by an unexpected 6.6% rise in energy prices compared with a 4.4% in May. Food prices rose 0.8% in June, compared to 0.3% in May.
The surprise rise came a day after June producer prices rose by 1.8% at the headline level on May and 9.2% in the year to June. The Core PPI hit 3%.
Fed Chairman Ben Bernanke told the US House of Reps overnight that troubled mortgage giants Fannie Mae and Freddie Mac are in "no danger of failing."
But while comforting, it was a 22% drop in quarterly earnings, accompanied by a 10% rise in dividend from Californian lender, Wells Fargo, that sparked much of the rally on Wall Street.
The drop was less than forecast, but analysts warned that Wells Fargo’s result was a one-off for various reasons, such as superior management. That’s why Warren Buffett and his Berkshire Hathaway group have been buying Wells Fargo shares over the past couple of years, even as the markets turned.
They recognise good management.
Well Fargo could end up buying the failed IndyMac Bank, also in California, that went bust last week in the third biggest US bank failure in history.
Watch our banks today: quite a few investors will rediscover them again.
