Data was solid – US home sales smashed estimates and held true month-on-month, while the Philly Fed manufacturing index also was stronger than estimated. This all gave the market another reason to continue to leg up.
The interesting move overnight was gold, falling solidly on speculation the Fed funds rates are under review – noteworthy considering equities were unhindered. With the Jackson Hole Symposium getting underway but not at press conference stage, the market is still evaluating the minutes from Wednesday. These showed members are now raising concerns over the current state of monetary policy.
Philly Fed President Charles Plosser, one of the hawks on the FOMC, reiterated his strong stance overnight, saying that if the Fed continues on its current path it may have to act harder and faster in the future. If the economy starts to run away, it could cause shocks to the economy and market.
However, the fact the fall in gold was not replicated in high-yielding equities reiterates my belief that the uptrend in the US markets will not only hold true but is unlikely to be broken by year end.
Speculation and hard evidence around the Fed’s monetary policy are very separate things. With Chairperson Yellen due to speak specifically on employment at the symposium, the top-down macro theme of ‘lower for longer’ will filter back into thinking – her views are well known and unlikely to have changed.
Data is stronger but the data that matters is muddled. Inflation remains contained, wage inflation is contracting and the employment mix contains bias towards part-time employment. So, despite more hawkish talk from the Fed members, it’s still hard to see the Fed funds rate rising in the next six months.
Come the beginning of 2015, the Fed is likely to map out a fluid timeframe on what it is looking for in the data and how it will hike rates. As with the ending of the asset purchase program, the rate hike program will be gradual and data-dependant. This is why I reiterated that equity markets on a top-down policy view (backed by bottom-up earnings) are going to see support of the yield trade for the rest of 2014.
Equity yields in the US are on par with the yields of credit papers with a BBB rating. Equity yields are therefore still attractive and the likely conclusion is that prices have upside as yields come down.
Ahead of the Australian open
The ASX will finish its second week in the green today, having added 204 points since the close on Friday the 8th. We are currently calling the ASX 200 up 14 points to 5652.
However, yesterday’s action was interesting. There was a bearish reversal after the index powered to within 25 points of 5700 before giving most of the early gains back. The movements in BHP and the banks suggest that bears will defend positions above 5650 with vigour. With the strength seen in overseas markets, the question will be how long they can hold the upward trend off.