Confidence up post-poll

Consumerand business sentiment on one hand, and confidence on the other, have jumped either side of the election such that optimists now comfortably outnumber pessimists.

This is despite the fact the actual conditions component of the latest NAB monthly business survey remains subdued, as the number of respondents assessing conditions as ‘favourable’ continue to track below those who say they are ‘unfavourable’.

As a result, the local debt market is scaling back pricing for another cash rate cut, and will watch this week’s meeting of the US Federal Reserve’s federal open market committee (FOMC) closely.

Last week we contended that only a soft payrolls report in the US and/or an escalation of military tensions in Syria stood in the way of the Fed laying out a timetable for the tapering of asset purchases at its impending meeting.

As it happens, the two events roughly cancel each other out. The payrolls report was, in fact, a bit on the soft side, implying there was no hurry to taper. But the apparent easing of the immediate threat of a US strike on Syria sent government bond yields higher still as safe haven demand for them waned.

And equity markets that were nervous about both tapering and military action – although not necessarily at the same time – seem to have shrugged off concerns for now as their long rally gets yet another leg up.

Annual growth in non-farm payrolls in the US has stalled well below 2 per cent, while monthly growth is not pointing to acceleration in the near-term. However the unemployment rate is trending towards the threshold when the US equivalent of the RBA’s cash rate target would be allowed rise again.

That is contingent on inflation being neither too low nor threatening to break much above 2 per cent. But unless the US dollar rockets higher when the Fed does start to taper, the chances of the world’s largest economy’s recovery from its deepest recession since the 1930s becoming self-sustaining are growing by the week.

And when it does, inflation will likely once again move back closer to 2 per cent than 1 per cent, at which point the Fed will orchestrate a graduated rise in the finds rate. That is most likely in 2015 rather than next year, but the Fed has always left itself plenty of room to manoeuvre.

Which is why this month’s meeting (as Business News goes to press) has been so eagerly anticipated, because it is one of the four during the year that includes a lot more information on the event, including a summary of all 19 FOMC members’ projections.

The Fed was shaken by the extent to which global bond yields rose after its informative June meeting it had to soften its rhetoric soon after it.

As the local debt market scales back its pricing of further cash rate cuts (and the soft payrolls report was interpreted as a signal that the Fed will hasten slowly), the Australian dollar’s recent slide has partially reversed.

A bit of upbeat data on China’s industrial production did no harm to the appetite for Australia’s currency either, as the spot US dollar iron ore price settles ever more comfortably above $130 a tonne.

But if the Australian dollar continues its renaissance, of sorts, another cash rate cut will come back onto the agenda – particularly if Thursday’s local labour report is soft once again.