ECB easing or no ECB easing, China rate cut or no rate cut, the US Federal Reserve will decide in December whether to lift rates. US markets say its a done deal, judging by the way they sold off this morning immediately after the central bank’s post meeting statement was issued, and then zoomed higher as they appreciated the statement has helped clarify the central bank’s intent.
The Fed’s statement just after 5am Sydney time, was followed two hours later by the Reserve Bank of New Zealand which left its cash rate steady at 2.75%, ending a run of three successive cuts of 0.25% as the central bank tried to offset the slide in global dairy prices.
The Dow had been up around 90 or more points and other indices had been positive as the Fed met, and down all went straight away as the Fed dropped the reference to foreign influences, raising the chances of a December rate rise.
But then cooler heads prevailed, traders recognised this was a positive for markets, not a negative, and up went shares (and the greenback’s gains were trimmed). So the Dow, S&P 500 and Nasdaq all ended with gains of 1% or more on the day. In fact it was the Dow’s highest close (17,779.52) since July.
So by the end of the session, Wall Street was much higher (European markets had a positive day), gold sold off by around $US10 an ounce (to around $US1,157) and oil jumped more than 6% as shorts got caught (to more than $US45 a barrel), well, short, and were forced to by back their contracts as prices rose and rose – that was despite another build up in US oil stockpiles last week.
Our market will start strongly today with a gain of more than 30 points in the ASX 200 after futures trading followed physical prices higher on Wall Street as investors reassessed the Fed’s statement.
The Aussie dollar initially fell back under 71 US cents, but then returned to around 71.05 in the wake of the rise in the greenback, thanks to the more positive tone from the Fed, and the weaker than expected September quarter CPI for Australia.
The key paragraphs from the Fed statement read “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” (that’s thew Fed’s twin mandate – jobs and inflation)
“This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”
The Fed left the door open to an increase in rates by dropping the previous warnings about the risks global financial and economic developments were posing to the US economy. Fed members repeated they want to see “some” continued progress on labor markets and be “reasonably confident” inflation is rising toward their 2% annual target before hiking rates.
The statement acknowledged there had been a slowing in job growth in the past couple of months in the US, but pointed to stronger housing and business investment.
But seeing there are clear signs the US economy has slowed in recent months from the 3.9% annual growth rate in the second quarter, the debate in the media and among Fed members will be – will a rate rise add to the slowing in the economy, or is it time to lift rates simply because after seven years with rates at 0% to 0.25% and three bouts of quantitative easing, it is time.
The first estimate of third quarter GDP is out tonight and could be around 1.7% to 2.0% annual – a halving in growth from the second quarter. But the first estimate of US GDP is always to loosest of the three.
So attention shifts to the two meeting on December 15 and 16. But a decision will be made – either increase rates or sit – the latter would be a big disappointment to markets and could damage the Fed’s credibility.
