Enough for each side

Almost no change to statement post the two-day FOMC August meeting. The buzzword is the mention of ‘some’, as this is all that is needed from the labour market conditions before lift-off can take place.

Source: Bloomberg

‘Some further improvement in the labour market’ is the line all are focusing on. It suggests a cumulative improvement is still needed for rates to rise in 2015. However, it’s vague and open to interpretation.

It’s why a December bull would suggest the US needs a few more month’s increases to wages and total participation before it starts its rate hike program. However, if you are a September bull, the language tweak is minimal and suggests that FOMC officials are pretty pleased with the current developments and may want to follow the ‘raise rates early and gradually, rather than late and steeply’ mantra.

The reactions from the market were, as expected, slightly USD positive and the US equity market rallied. Yellen’s mastery of communication continues as she simultaneously supports the markets while telling it rates are set to increase very soon.

Whatever month Yellen and co. flick the switch, investment banks perfectly sum up the rate hikes as: ‘baby steps’ (Goldman Sachs), ‘lazy rate hikes’ (Morgan Stanley) and ‘crawl off’ (Deutsche Bank).

The language illustrates just how small a move this will be and possibly why the equity market at least can slightly ignore the first one or two movements in the Fed funds rate. 

What else is spiking my interest

  • Commodities plunge in July has been savage: oil off 16%, copper off 8% and the remaining industrial metals off 5%. Yes, the China hard landing story will be a part of this issue. However, clearly supply-side is also to blame.
  • The CRM Commodities index clearly tells you that Australia is still seen as a commodities based economy with the AUD almost moving tick for tick.
  • The ASX material index is down 3% for the month.
  • The ASX as a whole is up 3% and will register its first positive trading month since February.
  • The move in the index to a service-based market is stark and the fact that financials now make up 47% of the index explains why, globally, we are seen as a defensive income play. Materials now only make up 13% of the ASX that compares to 19% in 2011 and 23% in 2007.
  • Earnings season expectations continue to be revised up, suggesting a possible volatile month in August as companies post in line numbers not enough to support P/E ratios that have moved back up to 16 times forward earnings.

Ahead of the Australian open

Ahead of the open, the ASX is pointing up 40 points to 5664.


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