\n\tBy Greg Peel<\/p>\n
\n\tThe Dow fell 138 points, or 0.9%, while the S&P fell 0.9% to 1582 and the Nasdaq<\/span> lost 0.9%.<\/p>\n \n\tThe latest Fed monetary policy statement suggested last night that despite signs of recovery, “fiscal policy is restraining growth”.<\/p>\n \n\tYes, it’s all the politicians' fault. The central bank has been pumping in money and pumping in money and still the US economy is failing to re-establish a comfortable level of growth that might have been expected by now when QE1<\/span> was rolled out three and a half years ago. The Fed is doing its bit, it believes, but is hampered by the sequester and resultant budget cuts, which simply act as a counter.<\/p>\n \n\tFor the past several months, the Fed has stuck to its US$85bn<\/span> per month bond purchase program, but talked often of how and when it might start easing back. Now that the data have begun to weaken once more, the Fed has become less decisive and, if could be suggested, desperate.<\/p>\n \n\t“The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.”<\/p>\n \n\tIt is not unusual for a central bank to be on “data watch” – the RBA<\/span> does it all the time. But then the RBA<\/span> watches to see whether a policy change is appropriate. The Fed is now going to increase QE or ease QE as the data determines. It is no longer the omnipotent being with the robust and consistent policy. It will now simply attempt to drive the US economy from the back seat until the US economy damn well gets it right.<\/p>\n \n\tThis is a policy change that comforts neither side of the QE debate. Those who worship at the altar of central bank intervention can now worry, again, that at the first sign of life the Fed will start rolling back its support. Those who believe the Fed is doing no more than prolonging the agony, and the US economy can only grow again if first left to recede naturally, can bemoan the reality that QE3<\/span> may indeed become “QE infinity” as many have suggested. And both sides can shake their heads at the politicians.<\/p>\n \n\tAs far as the data are concerned, the pendulum is continuing to swing to the “more QE needed” side. Unemployment is the Fed’s primary target, and last night ADP reported a seven-month low of 119,000 new jobs created in the private sector in April. Construction spending fell 1.7% in March. Strong domestic auto sales were a silver lining, but the US April manufacturing PMI fell to 50.7 from 51.3 and is threatening to slip into contraction.<\/p>\n \n\tLikewise the Chinese PMI, which fell to 50.6 from 50.9. Europe was closed for May Day, but the UK posted 49.8 – still contraction, but at least up from 48.3 in March. And then there’s Australia.<\/p>\n \n\tWe recall that the PMI is a second derivate<\/span> that measures the pace<\/em> of expansion\/contraction, with 50 the steady-speed level. A PMI of 60 is like Mark Webber planting his foot in his formula one racer. A PMI of 40 is like a Jumbo hitting the reverse thrusters on a short runway. Yesterday it was revealed Australia’s manufacturing PMI plunged from 44.4 in March to 36.7. Imagine slo-mo<\/span> footage of a test dummy driving into a brick wall.<\/p>\n \n\tSuccessive Australian governments have miserably failed to manage the mining boom and peak. The RBA<\/span> refuses to enter the Currency War. Central bankers around the world will tell you there is no Currency War, but they are merely lying through their protectionist teeth.<\/p>\n \n\tThe May Day holiday in Europe and China meant thin metals markets, which is not a good time for weak global data to be released. Last night zinc fell 1%, aluminium<\/span> and tin 2%, copper and lead 3% and nickel 4%. Brent crude fell US$1.89 to US$99.94\/bbl<\/span> and West Texas fell US$2.50 to US$90.96\/bbl<\/span>. OPEC will be beginning to panic.<\/p>\n \n\tSpot iron ore reopens today.<\/p>\n \n\tIf the Fed is prepared to increase QE on weak data, then weak data should mean a higher gold price. If it withdraws QE, that means a lower gold price. Last night gold fell US$19.20 to US$1457.10\/oz. The US dollar index fell 0.1% to 81.65, but the Aussie copped it, dropping 0.9% to US$1.0279.<\/p>\n \n\tThere were no strong US earnings reports of note last night to stem the data-based slide. Of the 500 S&P stocks, 342 have now reported, with 69% exceeding earnings forecasts. But of those 69%, 52% fell short on revenue. In a typical quarter, only 31% of companies beating on earnings will miss on revenue.<\/p>\n \n\tThe S&P 500 fell from the open and remained in the red all session. There was a mild bounce on the Fed statement, but the selling resumed once everyone had taken a closer look. Wall Street closed not quite, but almost on the lows of the day. Yet again the broad market index has turned south rapidly after posting a new high.<\/p>\n \n\tOne also wonders how much the “Sell in May” adage serves to psychologically fulfill its own prophecy.<\/p>\n \n\tThe Australian market had already begun to weaken yesterday, with the Asian zone PMI numbers offering little solace. The SPI<\/span> Overnight fell 24 points, or 0.5%.<\/p>\n \n\tRudi will appear on Sky Business today at noon. \n\tAll overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX<\/span> and more available in the FNArena<\/span> Cockpit. Click here<\/a>. (Subscribers can access prices in the Cockpit.)<\/em><\/p>\n \n\tAll paying members at FNArena<\/span> are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.<\/em><\/p>\n
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