15 December 2019
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It's a strange world where good economic news has many market players going negative.

Ignore the doom, look at this great news!

Peter Switzer
18 May 2016

By Peter Switzer

The Dow Jones index was down a little under 200 points, ahead of the minutes from the Federal Reserve, but why such negativity? Well, in simple terms, you’d have to say there’s been a lot of pretty good news and this has plenty of smarty traders worried that an interest rate rise is looming!

Yep, the negativity today is about positivity with the recent data flow and it has meant that the Fed minutes, which are due out tomorrow, could actually hint that a rate rise in the US is imminent.

Believe it or not, our stock market could ignore the US sell off today because the oil price continued to rise overnight and this has been a market-leading force. Oil has been largely behind both the stocks slide, as in the case of the January-February stocks dumping and the rise since mid-February, which left our market up 1.9% for 2016 and at a nine-month high! This rise betters America’s S&P 500 index, which now is up around only 0.1%, the German Dax off close to 8% and the Japanese Nikkei, which is down 12.5%.

And here’s another believe it or not — the oil price is now up about 75% since January 20 — and this actually is good news. Yeah, I know the rising price of a very important cost should be seen as a bad thing but that has been the biggest revelation of the past 12 months — lower oil prices cause more trouble than they deliver benefits. Of course, if they go too high, it becomes a problem too but it looks like there is a Goldilocks price and it’s more around current levels, closer to $US50 rather than $US25, which we saw earlier this year.

Oil is now looking safe from falling below $US 20 a barrel, with the likes of one-time oil bear — Goldman Sachs — recently turning bullish on ‘Texas tea’.

So what has changed? Well, supply has been hit by terrorism problems in Nigeria, political issues in Venezuela, a wildfire drama in Canada and the impact of the price slump via OPEC’s oversupply strategy last year, which meant the US has seen a record closing of oil rigs because the price was too low. And at the same time, the demand for oil has increased, which is something I mentioned here before Christmas and after New Year, thanks to the great work of my old mate Michael Knox from Morgans, who’s an economist who understands how commodity markets work. He told us there was a seasonal spike in oil prices around February-March and he was on the money, big time!

What is interesting is that one analyst actually compared the oil price rise to what central banks want. They want inflation and oil price rises deliver that. They want more economic activity and the businesses that suffered on low prices will be getting more active. To prove the point, the transport sector was the only one in positive territory on Wall Street overnight. And finally, the higher oil price has raised confidence and central banks really want that.

On top of that, the US has been getting better-than-expected economic data from jobs to last Friday’s retail numbers but even wages and hours worked are all screaming that the US is not heading towards recession, as some dopey doomsday merchants have been predicting.

Even overnight, the economic story was rosy, with housing starts up 6.2% in April. Building permits rose by 3.6%. Consumer prices rose by 0.4% in April against a forecast of 0.3%. It was the biggest rise in three years.

Meanwhile, industrial production rose by 0.7% in April versus a forecast of 0.3%, with the important capacity use rising from 74.8% to 75.4%.

All this makes it easier for the Federal Reserve to possibly raise interest rates in June, just when the market was betting on September.

It could also mean the Yanks might get two rate rises rather than the now expected one this year. Now this is good economic news but it worries market players, who don’t know how a stock market, which has been powered by virtually a zero rate of interest, will deal with the path towards normal interest rates.

If the Yanks had another rate rise and the market coped with it and cheered because it was saying that the US economy is stronger than the market assumed, then we’re taking steps away from the economic drama that has been the GFC. As Paul Keating might have called it — the US needs to have the rate rise it has to have. We need to see if the market can believe in the Fed-created economic recovery that drew a lot of criticism in November 2008, when it purchased $600 billion of mortgage-backed securities and QE 1 was born. It became QE2 and QE3 and some cynics declared QE infinity was on the way! However, it looks like the Fed has pulled it off and the US economy is growing and creating inflation again, which is more like a normal economy. 

Our central bank minutes yesterday were big news, with the Reserve Bank not hinting strongly enough for some that another rate cut was coming. And it did reinforce its view that our economy is looking pretty good. However, this is small beer compared to what the Fed says tomorrow. It could lead to a big market convulsion initially (if a June rate rise looks on the cards) but then it will be the more considered reaction that will be important for Wall Street and our market too.

Ah, the drama of economics and its impact on stock markets. And yes, right in the middle of an election campaign! Who said economics is boring?

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