Dovish Fed speakers turn the tide in markets again

The Fed-doves cooed overnight, and that lifted spirits in the US stock market.

Source: Bloomberg

Fed releases more doves

The Fed-doves cooed overnight, and that lifted spirits in the US stock market. Two influential voices from the Fed spoke during Wall Street trade, with each suggesting that interest rates ought to move lower, and that the central bank would not wait for a deterioration in economic data to do this. The marginally improved prospect of looser financial conditions immediately fed through to market pricing. And the developments managed to turn around what was an otherwise slack, if not slightly negative, day in global markets, following a sell-down in Asian and European equities, as well as news of an escalation in US-Iran tensions.

Stocks up, rates down, Dollar falls

The reassuring language from Fed speakers put a fire under Wall Street stocks and led to a fall in global interest rates. The S&P 500 challenged 3000 once again, adding around 0.4% for the session. The Fed-sensitive interest rate on US 2-Year Treasury note fell 6 basis points, as markets increased their bets of a double rate cut from the Fed at their July 31st meeting. The USD plunged half-a-per cent consequently, pushing the Aussie-Dollar above 0.7070. Falling global interest rates also set of a flurry in gold prices – and concurrently, Bitcoin – with the yellow metal registering a fresh 6 year high.

Sustained bullishness less than guaranteed

After its sell-off yesterday, the ASX ought to add about 12 points at the open this morning. The Australian stock market is being guided global forces right now. US earnings season have gotten off to a very slack start, and fresh belligerence from the Trump administration towards the Chinese as unsettled the post-G20 trade-war optimism. Really, markets are probably still overall in the process of a much-needed pullback. Valuations in the US and Australia are looking stretched, while technical indicators have suggested an overbought market for a little while. An improved earnings outlook is still required to sustain this bull run.

Jobs data mixed, if not slightly positive

Australian labour market highlighted the local economic calendar yesterday. On the surface, the results were mixed: the unemployment rate held steady at 5.2%, while the Australian economy only added a paltry 500 jobs overall in June. But digging into the detail, and some positive information emerged. Though the jobs change number printed well below expectations, the economy did manage to increase full-time jobs by 21.1k, at the expense of -20.6k part-time jobs. Furthermore, the underemployment rate managed to fall to 8.2% in seasonally adjusted terms, and the participation rate managed to hold steady at its historical high of 66.0%.

The spare capacity question

Those small details were the catalyst of the (very) mild bullishness witnessed in the AUD and interest rate markets yesterday. A reminder: the Australian economy’s malaise, and the RBA’s justification for recent interest rate cuts, can be tied back to “spare capacity” in the labour market. Although the headline unemployment rate is the best barometer of the extent of “spare capacity” in the labour market, the participation rate, underemployment rate and full-time employment are key indicators of whether the existing stock labour is being fully utilized. Improvements in these metrics suggest that maybe over time the unemployment rate will decrease, and soak-up “spare capacity”.

Economy’s overall growth trend unchanged

It must be said, the improvements in the jobs data were incredibly marginal. The fundamentals remain unchanged, overall: the unemployment rate is 5.2%, notionally full-employment is at 4.5%, and economic conditions are such that growth isn’t where it needs to be for the unemployment to fall to those levels. So: the prevailing trend remains broadly the same. Financial markets are still betting that the RBA will have little choice to but to cut interest rates again before the end of the year. As it stands now, according to market pricing, the RBA has one more cut in them – mostly likely in December.

Light data leads the eye to the next fortnight

An eye gets cast towards the next week, if not the next fortnight, now. Attention will be dominated by earnings releases from the US’s greatest tech-giants; as well as pivotal monetary policy decisions by the ECB and then then US Fed on the 31st. Market-bulls are going to be looking for much better results from US corporates that what has been seen so far this earnings season. Interest rate cuts and more explicitly dovish language from central bankers will also be required to fuel risk talking. If one or neither are forthcoming, then perhaps this wave lower in global stocks has further to run.


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