QE3 Still an Option
Good day, and welcome to the last Thursday in April. As Chuck mentioned, I’ll be steering the ship today while he travels to Florida for some conferences, so the call to the bullpen has been made. All in all, it was a fairly quiet day, and if I had to make a call one way or the other, I would have to say Wednesday turned out to be a risk-on type of day. While the U.S. earnings season has definitely fueled the risk on campers, it was touch-and-go for a while.
We started the day pretty flat, as the euro (EUR) traded at 1.32 and gold was in a holding pattern at $1,643, neither of which showed any direction. All of the other currencies were either trading at break-even or very close, so the markets were obviously waiting for something. The first bit of market-moving material was staring us down right out of the gate yesterday morning, which was the durable goods figure from March, and it wasn’t pretty.
The headline durable goods number decreased 4.2%, which is the most since January 2009, as demand for transportation equipment, namely aircraft, fell quite a bit from February’s robust numbers.
Orders for aircraft, which can be volatile from month to month, do act as a gauge for the broad domestic and global economy, but I think the auto portion of transportation is more telling of the domestic and local economies. Bookings for cars and associated parts increased only 0.1%, which was quite lower than last month’s 2% rise, but they at least held steady.
Still, it was a mixed bag at best. The durable goods minus transportation fell 1.1% from the revised 1.9% gain in February. The piece of the puzzle and the spin that had economists talking was the goods shipped portion, which is one of the components in calculating GDP. The gauge of shipped goods actually increased 2.6% and has some calling for a higher than expected first-quarter GDP reading. We won’t have to wait long, as the initial reading is due tomorrow morning.
The markets all but overlooked the fall in durable goods, as nothing really moved and the currencies were still sitting in the same place before the report was released. While it was a light day in the data department as far as the number of reports, the focus of the day fell squarely on the shoulders of the Fed. That’s right, the Fed rate meeting was yesterday, so everyone was sitting on seat’s edge just waiting to see what would happen.
Of course, it wasn’t the rate decision itself that held the market hostage, but instead, the sound bites that would follow garnered all of the attention. The rate decision was announced at 11:30 Central time, so I looked up at the currency screens shortly thereafter and saw that gold was down about $15 and that silver was trying to stay above $30. I wasn’t expecting any earth-changing developments, so it took me for surprise.
I saw rates remained on hold, so it wasn’t that. As it turned out, there was a knee-jerk reaction immediately following the meeting to the fact that unemployment forecasts were reduced and no additional stimulus measures were announced or planned. In fact, the unemployment rate estimate was reduced down to a range of 7.8-8.0% by year-end from January’s projection of 8.2-8.5%. Oddly enough, the currency market didn’t have much of a reaction and seemed unfazed by the initial release.
About an hour later, it was Bernanke’s turn on stage, as he spoke at the proceeding press conference and reversed previous thoughts that QE3 was all but out of the picture. I think the big headline from Bernanke was his announcement that the Fed is prepared to do more, if needed, to make sure the recovery continues and that inflation stays close to target. In other words, additional stimulus is still on the table, and the recent strides forward aren’t enough to rule out future action.
For the most part, everything he explained yesterday didn’t change much from the past several meetings, as the European crisis remains a concern, economic growth is expected to moderately continue in the coming quarters and unemployment isn’t falling as fast as they would like. As quickly as gold lost ground prior to the press conference, it quickly climbed back to where it began the day, since QE3 wasn’t totally removed as an option after all.
The last notable news bits from the meeting were a couple more revisions to growth and inflation. We did see an upward revision to GDP this year, from a range of 2.2-2.7% to 2.4-2.9%, so it looks as if the Fed is hopeful jobs growth will continue moving in the right direction. They also increased the inflation outlook to 1.9-2.0% and acknowledged it has picked up due to higher oil and gas prices.
They still maintain gas prices will affect inflation only temporarily, but I’m not sure how that would be the case if they expect continued expansion in the U.S. economy. Speaking of oil, we did see it rise back above $104 after the higher growth outlook, so U.S. demand still remains in the driver’s seat when it comes to price action. I think I’ve gone on long enough with the Fed meeting, so let’s take a look and see what reports are due today.
We’ll see the usual Thursday reports on weekly initial jobless claims and the continuing claims number, both of which are supposed to show slight improvement from last week. The initial claims are expected to come in at 375,000, but with the constant revisions, it’s tough to maintain a firm comparison point. With that said, we’re still far from a range needed to firmly put a dent in what I would consider the most telling and important economic figure. The March jobs numbers of 120,000 sure doesn’t go far in my book to justify the Fed’s rosier employment outlook.
We will also see the results of pending home sales from March, another area of concern by the Fed. Housing has been flailing around with no sense of direction as prices continue falling, albeit at a much-slower pace than in the past, but purchases have been slow to rise as buyers try to guess the market bottom. The estimates I’ve seen aren’t much to write about, but maybe that summerlike weather in March coaxed more buyers into signing contracts.
Other than that, we get a gauge of consumer confidence and a regional manufacturing report, so it looks as if today will be a balancing act between that ever-present lake of lava that is employment and housing. Depending how those reports turn out, we could see the market remain in a holding pattern until tomorrow, since we get some big reports. We’ll see the initial printing of first-quarter GDP, personal consumption and inflation, so this trio certainly has enough clout to hold the market captive until then.
As I mentioned earlier, the currencies remained in a very tight range, so there isn’t much to talk about on the currency front today. In fact, yesterday turned out to be one of the narrower trading days that we’ve seen lately, as the euro floated within a 0.5% window between the high and low of the day. Usually, we’ll see at least a full-cent deviation throughout the course of a given day, but that wasn’t the case.
Since the Fed left the door open for QE3 if needed, the dollar did finish down on the day, but by only a small margin. The top currencies were all commodity-based, as the rand (CHF) broke away from the pack with a 0.7% gain.
The rest of the currencies ranged from break-even to slight gains, as the Aussie (AUD) and Canadian dollars (CAD) took the silver and bronze medals, respectively. The only sizable moves came from gold and silver, when they fell 0.7% and 2.25% immediately following the rate announcement, but they did regain all lost ground by the time I left the office last night. The rise in equities kept most currencies in positive territories to finish the day.
I did see where S&P lowered India’s sovereign credit outlook to negative from stable, citing slower economic and investment growth, along with a wider current account deficit as the rationale.
While the actual rating was not downgraded, they did say if steps to reduce structural fiscal deficits and improvement in the investment climate are taken, they will re-evaluate. The Indian finance minister quickly stepped in to say that reforms are on track and economic growth should remain intact, but only time will tell. Surprisingly enough, the rupee (INR) actually finished slightly higher on the day.
Other than that, the only other development I saw before I called it a day was in New Zealand. The central bank met late in the afternoon, our time, and kept rates on hold as expected. The statement released after the meeting said the economy is still growing at a slower pace and inflation isn’t presenting any problems, so rates will probably be on hold for quite a while. The central bank governor, who is known for talking the currency down, went on the say that if the exchange rate remains strong and isn’t justified by stronger data, they might reassess the rate outlook. In other words, nothing new here, since he frequently expresses concern of a strong currency.
As I came in this morning, everything is trading in yesterday’s clothes, and there is an ever-so-slight bias to sell the dollar so far. There aren’t many headlines to speak of, but we did see a report on European economic confidence fall more than expected, as more austerity and economic uncertainty loom on the horizon. Even though the U.K. economy slipped back into recession following yesterday’s negative GDP print, we saw a report of investor sentiment rise this morning.
Then there was this… If Congress and President Barack Obama can’t agree on extending some of the tax breaks set to expire at year-end, the U.S. economy will be harmed so greatly that there is nothing the Federal Reserve can do to compensate for it, Chairman Ben Bernanke said.
“If no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there’s absolutely no chance that the Federal Reserve could or would have any ability to offset that effect on the economy,” he said. I saw this article in Bloomberg this morning, so hopefully this is yet another wake-up call to get things under control.
To recap…We started the day with the worst durable goods print since January 2009, but the markets were focused on the Fed rate meeting. They did keep rates on hold, as we expected, but an increased economic growth forecast initially sent some investors calling for no more QE3. Once Bernanke held the press conference, he said additional stimulus is an option if the economy stumbles. Gold and silver went for a ride around the block, but the currencies stayed home. S&P lowered India’s outlook, and New Zealand kept rates on hold.