Jozi, Jozi. 26o 12' 16" S, 28o 2' 44" E. We have started today much worse, in part a weakening Wall Street from where we left off, we will explore the Fed announcement at length and see whether or not their next approach is a good one. I think so, anyhow. In Jozi yesterday we had bad traffic of course, that is a daily event (twice a day), but the markets did OK, quite well, industrials did really well, a percent and a quarter better. Retail stocks took a bit of a breather after having rushed northwards in the prior session. At the end of the session here in Jozi, the all share index had added 218 points or nearly two thirds of a percent to 34192. Banks are roaring. Gold and Platinum stocks are not. Not at all. Today the gold stocks are down three and a half percent, the platinum stocks are off a percent and a half.
New York, New York. 40o 43' 0" N, 74o 0' 0" W. Believe it or not, or perhaps we should just say Ripley, but the Fed thinks that there is little or no need for new stimulus. I am pretty sure that we said as much. Anyhow, in their minutes release last evening the expectations were for the Fed to reveal some or other plan to embark down another round of quantitative easing, you know, QE3. But my contention has always been, the Fed knows that no ship builder ever built a ship with that name. So therefore it is not possible. No, that is not the reason. The minutes of the March 13 meeting were released last night, yesterday afternoon, and are available to view over here -> Minutes of the Federal Open Market Committee March 13, 2012.
Read them. You see, economic activity is expanding at a moderate rate, labour (or labor) market conditions are improving and the unemployment rate, although elevated is coming down. Weekly jobless claims are a good indicator of where you see the unemployment rate going, that has improved to around a four year low, the weekly number. And consumer price inflation has been subdued, although the minutes noted that crude oil prices and gasoline heading higher were (and are) of some concern. Manufacturing continues to improve. Real personal consumption remains flat, even as households real disposable income increases. Perhaps reflective of caution which is now ingrained in consumers minds as a result of presentism. Today is what the future will be (or so you think), that is the curse of presentism.
The housing market is improving, but is still pretty much nowhere where everyone want it to be. And guess what, the US government is spending less on defense (defence) spending. Exports and imports are improving, and the Fed notes that on the ground in Europe, economic activity is starting to improve. My latest line is as follows, if everyone was waiting for the Greek moment to pass (which I think they were) before making strategic business decisions, then you would think that the coming numbers will improve. And be better than anticipated, that is what I am looking for, improving European economic data to back up my simple theory. Because perceptions lead to reality because someone takes the plunge.
The bond markets, the Fed goes into some pretty detailed stuff around sovereign bonds, municipal bonds, corporate issuances, on balance it all looks OK I guess, the municipal market is described as follows: "Gross long-term issuance of municipal bonds was subdued in the first two months of this year. Meanwhile, spreads on credit default swaps for debt issued by states were roughly flat over the intermeeting period." So, as the risk of taking a swipe at Meredith Whitney, no multiple defaults, and not completely distressed for the muni bond market. Ah well, right once, not right again, for now anyhow.
OK, and then into the meaty (and potatoes) part of the minutes, what the Fed actually thinks about the economy. In my experience, what I have viewed over the years, these forecasts are only valuable for the moment, the economic outlook changes quickly, for better or for worse. So, if the Fed says that their March outlook for this year and the next has improved, that means their outlook has got a little sunnier. Less fog. This is good too. Back to that gasoline and oil prices, the Fed noted that the much lower gas prices, as a result of a warmer winter, lower energy bills on the home front are helping cushion higher gasoline prices. In home energy is cheaper, out of home energy is not.
Economic activity is improving, the unemployment rate is coming down. Inflation is not a problem. But Mr. Market saw no new Fed programs. And that caused a selloff of sorts. The way that I interpret it is that the Fed see that they no longer have to be all present, and have stepped away. Which means that they think their extraordinary participation is nearing an exit point, that is coming soon. In fact, this is the reason that Jeff Lacker keeps dissenting, because in his mind, there is no need to proceed down this path, he probably thinks that the Fed should raise rates before 2014. Check it out:
"Mr. Lacker dissented because he did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In his view, with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures. Mr. Lacker continues to prefer to provide forward guidance regarding future Committee policy actions through the inclusion of FOMC participants' projections of the federal funds rate in the Summary of Economic Projections (SEP)."
Well, you might view as dissent, I view it as slightly optimistic. But then again I would, that is my nature. Which leads me nicely into my next piece.
Human beings can evolve and do evolve (the opposite of presentism), in particular in their spending habits. If a commodity, that you almost have to use becomes expensive, then we adapt, by becoming more efficient in our usage. Think how around the house that you have replaced the old bulbs with new ones. Think of how you have also adapted with fuel prices increasing. I am pretty sure that we will see more motorcycles on our roads as the petrol prices here on the Highveld reach nearly 12 Rand a litre. People will just evolve and deal with the cost escalations in different ways. What I am getting to is simple, March auto sales in the US turned out to be the best month in years. What? Across the Atlantic, motor vehicle sales in Italy are falling off a cliff. Volkswagen sales jumped to a 29 year high. Yes, I am not kidding you, the last time that VW had such a good month in the US was back in 1973. Driven (ha-ha) by sales of their Passat brand, which clocked the same for the month of March that they did two years ago. Amazing. Those Superbowl adverts with Darth Vader must have worked!
Toyota clocked their best month in four year, over 203 thousand vehicles sold. Phew. Fuel efficient motor vehicles led the charge as higher gasoline prices started to make American consumers downsize their vehicle size. Even the little Fiat 500 subcompact is a hot seller, gone are the days of a monster truck to get you around. GM sales were lower then their competitors, but still clocked 231 thousand units. Ford had sales of 223 thousand, whilst Chrysler (owned by Fiat) managed to add 163 thousand. Just to put it into perspective, NAAMSA reported aggregate sales of 572241 units last year. GM, Ford and Toyota sold more vehicles in the US last month, than South Africa clocked for the whole of last year. Smaller cars, easier credit, that sounds like a good outcome to me and signs of an improving economy.
Currencies and commodities corner. Dr. Copper is lower at 385 US cents per pound, the gold price started to show signs of stress as the Fed were less present, last at 1632 Dollars per fine ounce. The platinum price is also lower, last at 1625 Dollars per fine ounce. The oil price is last at 103.24 Dollars per barrel. The Rand is weaker this morning as we see quite a significant sell off here, 7.78 to the US Dollar, 12.35 to the Pound Sterling and 10.25 to the Euro.
Parting shot. A Spanish bond auction this morning seemingly went off badly, that is weighing on markets today. There is the small matter of the ADP report, which excites all and sundry. And because the nonfarm payrolls falls on Friday, which is of course a holiday in the Western World. So the ADP thing will be big, I have no doubt about that!
Sasha Naryshkine and Byron Lotter
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