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Friday’s non-farm payrolls (the weakest read since the rogue December 2013 75,000 read) saw negative trading on the futures. It is pleasing to see we are not back in the 2011 to 2013 days of bad news is good news. Trading overnight however come down to the fact that the FOMC is back making headlines around its ‘fluid’ timeline around the Fed funds rate.
The positive print in my opinion was down to something we have long suspected for several years - the Fed has used monetary policy to create the ‘wealth effect’.
It’s a simple idea - make people feel wealthier and they will consume more. The appreciation in the S&P over the past six year has been tremendous on the back of four trillion US dollars pumped into the system. However, overnight was the first time we have actually seen acknowledgement from the Fed that that is part of the Fed’s thinking.
Here is New York President Bill Dudley’s answer at an address in Newark last night to a question about what the Fed will do would if the market reacts poorly to rising the Fed funds rate:
“If we raise interest rates and portfolios perform poorly, that’s likely to slow us down.”
We have long suspected this was the case and now it looks to be confirmed; it is why the market is pricing in an October move and why most now believe, as Mr Dudley himself stated, that the rate rise will be shallow. The non-farm payrolls also suggested that Q1 GDP will be weak, further confirming the data-dependant Fed will wait to the final quarter of the year to move.
This same central bank powered wealth effect is clearly happening around the globe. It is why we are still bullish on Japanese and European (specifically the DAX) equities. The ECB and the BoJ are in a race to the highest levels of accommodation possible. The EUR and the JPY will remain the weakest two currencies in the G10 and something we remain cognisant of in our strategic thinking.
Will they or won’t they?
The brings me today to: the Reserve Bank of Australia (RBA) has clearly supported the equity market with the rate cuts over the past four years; Australia remains in the market for the equity ‘yield trade’ considering the rate companies will pay out in 2015 are well above 50%. Any stock with a yield above 4.3% is being snapped up – so will the RBA further support the market with another rate cut?
At the March meeting the RBA adopted a strong easing bias, suggesting it was ‘appropriate to hold interest rates steady for the time being’. The question is, given the recent data flow and the RBA’s economic projections, is there enough data to suggest ‘the time being’ remains true, or will it ease again today, or wait until May?
If the RBA is going to pause today it will be to get more information around the red hot Sydney property market, which is clearly its number one concern. However, the housing market is a slow moving ship - the current dynamics are unlikely to alter significantly by May and if anything momentum will remain to the upside, therefore by May the heat could be turned right up.
The RBA would also be keen to see the March employment data (Thursday 16 April) and the Q1 2015 CPI print (Wednesday 22 April). The latter is expected to be extremely subdued with a headline print of 1.3% (although core inflation is likely to be above 2%), so this may give the RBA further confirmation that it needs to act.
The final part of the April data will be the May Statement on Monetary Policy, while the RBA will also be keen to see if the February cuts feed more clearly into business and consumer confidence.
We argue that if it is going to follow its February mantra of ‘why wait’, then the CAPEX numbers have to be a major concern. The RBA sees the non-mining space as the space that will fill the gap of the rapidly contracting mining space. Yet we saw a 9% contraction in spending expectations at the previous read. It is a long way off expanding, let alone covering the 20% decline in spending from the mining space.
Market price for today is 70.8% chance of a 25 basis point cut - so far the market is one from two. The market picked the February cut and expected one in March, only to see the bank holding the line.
Economists are on the hold front, with 16 of the 27 surveyed saying no move. The argument is therefor a ‘why wait’ move, however will the Sydney housing market hold sway again?
We are calling the ASX 200 up 31 points to 5929 as the rate cut expectations get built into yield stocks, which would unwind if we get no move for a second month running.