By Greg Peel
The Dow closed down 12 points or 0.1% while the S&P lost 0.2% to 1355 and the Nasdaq finished flat.
On those numbers you'd be forgiven for thinking it was a dull night on Wall Street, but quite the opposite is true. Acknowledging that the only players in the market at present are rapid-fire short-term computer models, Wall Street rocked and rolled its way to the close as Ben Bernanke provided another one of his Chubby Checker impersonations.
Those computers have a tendency to merely glance at a Fed policy statement and respond immediately, before reading further down the page and deciding they should have gone the other way. What's more, this meeting was one of the four per year backed up by a Bernanke press conference, at which offhand comments can also move mountains. So it was that in the early New York afternoon the Fed released its statement and the computers saw no QE3. The Dow had done little up to that point, but quickly plunged 80 points. At the press conference however, Bernanke suggested "We still do have considerable scope to do more. If we're not seeing sustained improvement in the labour market that would require additional action".
So the Dow shot up 110 points (to be up 30). What the Fed actually has decided is to extend its so-called Operation Twist program, in which short maturities are sold to buy longer maturities thus keeping longer rates low without expanding the Fed balance sheet. At the end of the day, this is exactly what Wall Street consensus had the Fed announcing going into the meeting. But it wasn't yet the end of the day.
Some of those computers decided Operation Twist, which has arguably proven fairly impotent up to this point, was not good enough. So they sold again, and the Dow fell 110 points (to be down 80). But other computers decided it was just a timing issue. Bernanke did not rule out QE3 so if it wasn't going to happen today, it will probably happen in August. And so the Dow rallied back to near unchanged at the close.
Then everyone had a rest.
The bottom line is that despite one of the more anticipated Fed meetings is now behind us, nothing at all has changed. The Fed will keep twisting, and QE3 will remain in the wings as an eager understudy. The only argument now is whether QE3 will indeed see the spotlight, and the suggestion is that (a) the way things are going there is a very good chance and (b) it will have to happen before the US election. Every year the Fed holds a conference at Jackson Hole in August. Both QE1 and QE2 were announced at Jackson Hole.
Clearly Bernanke does not see the need to go too hard too soon, but he does have falling inflation on his side. Last night the Fed lowered its forecasts, predicting US GDP growth of 1.9-2.4% this year, down from April's 2.4-2.9%, and 2.2-2.8% in 2013, down from 2.7-3.1%. The Fed sees unemployment at 8.0-8.2% this year, up from 7.8-8.0%, and 7.5-8.0% in 2013, up from 7.3-7.7%. The trick, as always, will be to watch the payroll numbers from here. Bad numbers will actually be good, because they will increase the chances of QE3.
Then there's the small matter of the so-called "fiscal cliff". It is not typically the role of the Fed to comment on fiscal policy that hasn't yet been implemented, but a question was asked at the conference and Bernanke did throw in his two dimes worth. In short, he saw the fiscal cliff as being as much of a potential problem as everyone else feels it will be, hence again improving the chances for QE3.
The "fiscal cliff" refers to the simultaneous end of year expiry of the Bush tax cuts and the the beginning of the spending cuts forced by the farcical Congressional wranglings of 2011 ? those which helped prompt the US credit downgrade. An economy struggling to find its feet will not be helped by a simultaneous increase in taxes and cut in spending, and the impact on the economy may also prevent any real budget deficit reduction, Now where have I heard that happening before? Oh yes ? Europe.
There are some commentators in the US who feel Europe's current issues are mere distractions compared to the potentially economically devastating impact of the fiscal cliff. Talk is of a US recession in 2013. Unless, of course, the two parties can come to an agreement in Congress prior to the election. We all know how well that went last year ? imagine how well it will go if the Republicans think they have a sniff.
Speaking of Europe, there's a new government in Greece. Woohoo! What happens now? Who knows? There was some mild excitement last night when it had appeared Merkel was ready to let the ESM/EFSF directly buy Spanish and Italian bonds, but this subsided when it was revealed Merkel had only said such a practice was not strictly illegal. As you were.
So after another tumultuous couple of weeks, where are we? Nowhere much different than we were before. We have a government in Greece that may well last five minutes, and a US central bank sticking to its guns of not yet using its guns. What we will now await is just what concessions Germany will give to Greece and the rest of the eurozone as it bows to the pressure of the new, popular, French-led pro-growth movement.
Currencies all followed the same wild ride as stocks last night, before ending up basically square. However, the US dollar did spike up at one point on the initial "no QE3" response, just in time for commodity markets to close. Hence base metals are all off around a percent and a half, while the oils, aided by a "surprising" US weekly inventory build (analysts have never got that forecast right, not ever) took a hammering. Brent fell US$3.07 to US$92.69/bbl and West Texas dropped US$2.97 to US$81.06/bbl.
The lack of immediate QE3 means gold should be lower for now, and so it fell US$11.30 to US$1606.80/oz. US bond yields are little changed in the end and the Aussie is still sitting just under US$1.02.
The SPI Overnight rose 15 points or 0.4%.
Rudi is presenting at conference in Hong Kong today and as such will not be making his regular appearance on Sky Business.