The Overnight Report: Best To Throw A Taper Tantrum Early

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December 4, 2013 10:06 AM EST

By Greg Peel

The Dow closed down 94 points or 0.6% to 15,914 while the S&P lost 0.3% to 1795 and the Nasdaq fell 0.2%.

Congratulations Glenn Stevens. It is not uncommon for RBA monetary policy statements to vary little from one month to the next, perhaps adding an extra sentence here or omitting a line or two, or maybe choosing a slightly stronger/weaker adjective where appropriate. But I cannot recall ? an economist might be able to correct me ? in my time of covering RBA policy when the monthly statement has been word for word identical to that of the month prior. That's what we got yesterday.

It's no real surprise, and there is no suggestion of laziness on Glenn's part. Ahead of yesterday's board meeting no one expected a change in the cash rate, and if the cash rate doesn't change this implies no change to the macro environment since last month. The Australian economy is still running "a bit below trend", non-mining investment is expected to pick up but "considerable uncertainty surrounds this outlook", and there's been an improvement in sentiment but "it is still unclear how persistent this will be".

Most importantly, the full effects of recent rate cuts "are still coming through, and will be for a while yet", while the level of the Aussie dollar is still "uncomfortably high".

Those last two rather balance each other out, while elsewhere there is too much uncertainty to dictate a clear policy response.

The Commonwealth Bank economists agree a lower Aussie is needed if the economy is to "rebalance" post the mining investment boom. But CBA is quick to reinforce the message that it is only the boom in mining investment that is peaking, not mining revenues. In response to yesterday's release of the September quarter current account numbers, the economists noted:

"There are clear signs that one part of the required growth transition is underway. Export volume growth is rising, courtesy of China's strong demand for our resources and it is outstripping growth in imports. The rise in exports was magnified by a fall in the volumes of goods and services imports. So, net exports added significantly (0.7 percentage points) to Q3 GDP and could contribute well over 1% to 2013 GDP."

All we need to see, in order for the Australian economy to return to the trend of 3% GDP growth, is "firm growth in our major trading partners" and an Aussie at "more normal" levels. Unfortunately Chinese growth translates into a stronger Aussie. The swing factor is the denominator (USD), and that comes down to Fed policy.

Today will see the release of Australia's September quarter GDP.

In December quarter terms, yesterday's retail sales numbers for October showed a 0.5% gain against 0.4% expectation and a revision of the September number to 0.9% from 0.8%. The annual rate is sitting at 3.6% which is just above the five-year average. Note that the five-year average came down a lot after 2007 dropped off the end. Most notably, Australians are re-emerging from the safety of their own kitchens to spend up big on restaurants, cafes and takeaway. On the losing side are department stores.

Yesterday's release of Beijing's official Chinese service sector PMI for November showed a fall to 56.0 from 56.3 in October. A fall, but only to a still-strong pace of expansion. Bridge Street is not currently in the mood for weaker numbers nonetheless.

My headline yesterday for this Report was "A Time To Sell" and that's exactly what Wall Street did last night. The data point for the session was November vehicle sales which jumped a lot more than expected, albeit discounting was rife. Nevertheless, Wall Street is looking at the recent data, such as the strong manufacturing PMI, and deciding the odds are shortening for Fed tapering sooner rather than later. Tonight sees the ADP private sector jobs numbers which will provide clues for Friday's non-farm payrolls release, and although no one is ever quite sure which way Wall Street will jump on the jobs numbers it is perhaps best to square up beforehand just in case.

The Dow was down 150 points at its nadir so we did at least see a little bargain hunting towards the bell. The bottom line, however, is that last night's close saw the Dow back below 16,000 and the S&P back below 1800. No great surprise ? these psychological "big figures" always require a bit of work to overcome.

Squaring up ahead of the jobs numbers was also apparent in the US dollar, which fell 0.4% to 80.62 on its index. The combination of a relatively solid current account result and the lower greenback helped the Aussie back up 0.3% to US$0.9138. Gold clawed back US$3.00 to US$1222.40/oz.

Base metals barely troubled the scorer, but spot iron ore jumped US$1.40 to US$138.20/t.

Just when we thought we knew all the global hotspots of geopolitical influence over the oil price (Libya, Iraq, Iran...), up pops the Ukraine as an unlikely mover of crude prices. Pipelines transporting oil and gas from Russia to eager European markets pass through the Ukraine, putting the former soviet nation in a position of unintended control post the fall of the Wall. Ukrainians and Russians are not exactly bosom buddies, hence a decision by Kiev to side with Moscow on matters of energy export control has sparked protests among the locals. Throw in anxiety over tonight's OPEC meeting in Vienna and oil traders decided last night it was best to buy.

Brent crude rose US$1.14 to US$112.61/bbl while West Texas leapt US$2.26 to US$96.08/bbl. Looks like they're a bit short over on the Nymex.

The SPI Overnight fell 28 points or 0.5%.

It's service sector PMI day around the globe today, starting with Australia, then HSBC's China number, followed by the eurozone, UK and US. As noted, it's GDP day locally.

In the US it's those private sector jobs numbers along with the Fed Beige Book.

It's also Dick Day in Australia today. The man who gave his name to the company but for a long time has had nothing to do with it will no doubt be watching on with interest as Dick Smith Holdings ((DSH)) hits the boards.

Rudi had to cancel his regular appearance on Sky Business today, but should be on TV tomorrow at noon as per usual.

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