Stocks were a little lower but bonds and the US dollar rose after a one-two punch from Fed chair Janet Yellen and her deputy Stanley Fischer put the chance of a September meeting rate rise on the table.
SPI 200 traders weren’t too fazed though with the September contract down just 4 points, suggesting it should be a reasonably benign open to trade this morning.
Elsewhere the Australian dollar is lower, iron ore is down, oil is up but well off its Friday night highs and gold is under pressure.
Here’s the scoreboard (7.28am):
- Dow: 18395 -53 (-0.29%)
- S&P 500: 2169 -3 (-0.16%)
- SPI 200 Futures (September): 5,482, -4 (-0.1%)
- AUDUSD: 0.7552 -0.0062 (-0.81%)
The top stories
1. Janet Yellen made the case for a Fed rate hike but Stanley Fischer provided the hammer blow. Janet Yellen was far from scary in her speech at Jackson Hole on Friday. But she did say the case for a rate hike has probably been made noting “in light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months”. She of course also said any FOMC “decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook”.
So not to scary. But then chatting on CNBC Fed vice-chair Stanley Fischer answered a question on whether September was on the table by saying “I think what the Chair said today was consistent with answering yes to both of your questions, but these are not things we know until we see the data”. So data is still key. But with another potentially strong non-farm payrolls Friday…
On that note Janus Capital’s Bill Gross told CNBC (via Bloomberg): “To the extent that next month we see a decent job growth number, then I think for sure or close to for sure, you know, in September we’re going to see a Fed hike of 25 basis points. The market hadn’t expected that.”
2. So now we hear endless reports of the “probability” of a Fed hike. But this former Dallas Fed president says it’s a made up number. I love this story, it’s so true. Bob McTeer, the former Dallas Fed president, says the notion of “probability” around a Fed hike based on futures markets is rubbish. Writing in Forbes he said (my emphasis): “Having been a member of the FOMC for almost 14 years, not to mention about 12 years attending the Jackson Hole Symposium, I was intrigued by how the financial networks had gotten so smart. In my experience, I walked into many FOMC meetings wondering what the outcome would be. Even my own vote was usually dependent on the accumulated data and the persuasiveness of the various points of view around the table. I doubt that that has changed very much.”
But hey, strategists gotta write about that stuff and journos want to report on it. To both it offers faux precision. What’s important here though is what McTeer says about data. That’s what’s important. That’s what really drives the probability.
3. That said, watching the bond market is the best way to know where stocks might head. Friday saw the 2 year US rate jump to 0.845%. That’s the highest level since June. It’s something to watch because if there is one thing that could unravel stocks, and global market sentiment, quickly in the month ahead, it is a big sell off in US bond markets. That’s because rising US bonds will put upward pressure on the US dollar and other bond rates around the world but also because it will change the valuation dynamics around global stocks.
Higher bonds make stocks, already richly priced on a PE basis, look more expensive relative to bonds. Here’s the US 2s and 10s from my Reuters Eikon Terminal…watch this space.
4. If you really want to understand Australian company earnings season you have to ignore BHP. From CommSec comes an interesting look at the current earnings season which winds down this week. Two things jump out at you. First is that overall the performance of listed Australian companies so far has been okay. The second is that there are two sides to the expectations beat or not argument, according to James. “While it is reported that earnings results have fallen generally fallen short of so-called ‘market expectations’, that may reflect the quality of expectations,” he said.
5. The world’s biggest pension fund lost $52 billion last quarter. Via Bloomberg comes the news that Japan’s “Government Pension Investment Fund lost 3.9 percent, or 5.2 trillion yen ($52 billion), in the three months ended June 30, reducing assets to 129.7 trillion yen, it said in Tokyo on Friday. That erases a 4.1 trillion yen investing return for the previous six quarters starting October 2014, the month it decided to put half its assets into equities.”
It’s just another sign of how tough things are for Japan at the moment but the fund president, Norihiro Takahashi, said in a statement Friday:”We invest with a long-term view. Even if market prices fluctuate in the short term, it won’t damage pension beneficiaries. We are also strengthening risk management and continuing to hire experts.”
6. US GDP was only 1.1% Friday but consumers are killing it. Back to the US economy for a sec. I was asked on Sky Business this morning about whether the 1.1% GDP growth would give Janet Yellen pause to think again in September. Naturally the answer is yes – if the data between then and now is on the weaker side.
But I also highlighted that the consumer sector in the US is actually doing okay. Akin Oyedele reports
that personal consumption, which surged in the second quarter, was revised even higher, to a 4.4% rate from 4.2%. That was the fastest pace since the last three months of 2014.
That’s what the Fed is talking about.
Oh and to reinforce the the improvement in the economy, the Fed is expecting the latest update of the Atlanta Fed’s GDP nowcast for the second quarter is currently 3.4% as at August 25.
Key data for the past 24 hours (with thanks to BNZ markets)
JP: CPI ex food, energy (y/y%), Jul: 0.3 vs. 0.4
GE: GfK consumer confidence, Sep: 10.2 vs. 10.0
US: Advance trade balance ($bn), Jul: -59.3 vs. -63.0 exp.
US: GDP (ann. rate %), Q2 S: 1.1 vs. 1.1 exp.
US: U. of Mich. cons. sentiment, Aug F: 89.8 vs. 90.8 exp.
US: Jackson Hole Symposium: Fischer trumps Yellen
And now from CMC Markets’ Michael Mccarthy is today’s Stock of the Day
Webjet – Mind the gap
Webjet reported strongly last week. Revenue up 29%, profit up 27%. Naturally, the share price (ahem) took off.
They’re impressive numbers. The problem can also be expressed in numbers. A market capitalisation of near $1 billion dollars, against a net profit of $22 million. Long term growth estimates around 15% and a P/E around 50x gives a P/E to growth ratio above 3, when 1 – 1.5 is attractive. The Webjet story is compelling, but the share price is not.
The next round of growth may see Webjet *clears throat* come back to earth. Greater involvement of bricks and mortar and third party alliances may slow growth rates or reduce margins, or both. The trajectory remains positive, but the pace may slow.
Now check the chart. A huge gap followed the announcement and now a possible double top formation, rejecting the $10 level. Webjet is definitely on my radar (sorry) but I suspect I’ll get a chance to buy closer to $8.
Michael McCarthy, chief market strategist, CMC Markets
You can follow Michael on Twitter @MMcCarthy_CMC