Stocks bounce as Fed rate hike fears recede, risk is back.

Quick Recap

It’s all a bit fractured again. But in a good way today because the news that the Fed is walking away from a 2015 hike helped stocks rally in Asia. This positivity then filtered in European and US trade so that at the close the worst performed of the overnight indexes was the FTSE in London with the very healthy rise of 1.1%. The best performer of the big markets I watch was the Nasdaq  which rose 1.8%.

Citibank’s good earnings performance certainly helped in the US as well because even though Goldman Sachs disappointed the strength of the commercial bank’s performance speaks to a relatively healthy economy.

Which is the really interesting thing about the Fed, the economy might have passed its sweet spot and the weak PPI result speaks to an economy with little pricing power. But last night’s release of CPI and non-farm payrolls really highlights that some sectors of the economy are still doing really well and were it not for “conditions abroad” there is almost no chance that the fed would have left rates at zero percent in September.

Here’s what I wrote at Business Insider this morning on the overnight data:

Akin Oyedele from BI US reports that “US inflation fell in September, but not really. The consumer price index (CPI) fell 0.2% compared to August, below expectations, and was flat year-on-year, according to the Bureau of Labour Statistics. But excluding volatile food and energy costs, core CPI rose 0.2% month-on-month, and 1.9% year-on-year. The energy and gasoline indexes declined sharply, while indexes for food, and all items excluding food and energy rose.”

So the monthly data is still on the weakish side but the annual rate is climbing back toward 2%. That kind of makes the case for the Fed hike particularly when the jobs market continues to look strong as the jobless claims data showed last night.

Akin reported, “The monthly average of initial jobless claims fell to 265,000, the lowest level since December 1973. Last week, unemployment insurance claims totaled 255,000, down from 263,000 in the prior period, and better than expected.”

So, it’s not hard to see why both economists and the market are confused and why there seems to be a mild civil war happening at the Fed as the Washington-based governors battle the regionally-based presidents.

The problem is that it’s still manufacturing in the US and around the world that gets most of the focus even though developed market economies are mostly services and consumption based.

On that note it’s worth highlighting the other important data out last night was manufacturing based which continues to point to a real challenge for industry. The NAB’s Ray Attrill wrote this morning, “Incoming survey data meanwhile was not so flash, with the Empire manufacturing index lifting to -11.36 from -14.67but which was expected to rise to -8.0. The Philly Fed survey also rose, but only to -4.5 from -6.0 against -2 expected, but the new orders index plunged tom -10.6 from +9.4. Five months ago it was 15.2.”

The picture in this tweet from Bloomberg shows the divergence between manufacturing and services nicely:

In theend the US dollar  got areprive fromteh CPI but also from comments from ECB member and head of the Austrian Central bank Ewald Nowotny. BI UK’s Mike Bird reportshe said inflation is too low and that “it’s quite obvious that additional sets of instruments are necessary.” That signalled a halt to the Euro’s rally, US dollar’s fall, and the Euro is down around 1 cent from this time yesterday. Sterling has remained strong, the Yen is still below 119 and the Kiwi is still ripping higher and is up another 1% today to 0.6852. That means that even though the Australian dollar is above 73 cents AUDNZD has collapsed to 1.0694.

On commodity markets, iron ore is down again, or went splat as David Scutt put it this morning. Crude Oil recovered early weakness into the $45 region recovering an amazing $1.60 a barrel to be up on the day. Dr copper is up again this morning and gold is only down a smidge.

The overnight scoreboard (6.42am AEDT):

• Dow Jones Industrials +1.28% to 17,141
• Nasdaq Composite +1.82% to 4,870
• S&P 500 +1.49% to 2,023
• London (FTSE 100) +1.1% to 6,338
• Frankfurt (DAX) +1.5% to 10,064
• Tokyo (Nikkei) +1.15% to 18,096
• Shanghai (composite)+2.32% to 3,338
• Hong Kong (Hang Seng) +2% to 22,888
• ASX Futures overnight (SPI December) +39 to 5,246
• AUDUSD: 0.7333
• EURUSD: 1.1375
• USDJPY: 118.87
• GBPUSD: 1.5489
• USDCAD: 1.2846
• Nymex Crude (front contract): $46.96
• Copper (US front contract): $2.43
• Gold: $1,182
• Dalian Iron Ore (January): 369.5 (denominated in CNY)
• US 10 year bond rate: 2.01%
• Australian 10 year bond rate: 2.57%

On the day

On the data front it is a big day today in Australia with the RBA releasing its Financial Stability Review. It’s the RBA’s deep dive into how things are going in the Australian economy and the financial system. So we’ll get a look at where the RBA sees the risks and the strengths.

Offshore we get Kiwi CPI, speech’s from both the governor and deputy governor of the BoJ, trade in Italy and then EU CPI and trade. In the US its industrial production, capacity utilisation, uni of Michigan consumer confidence and the news on investment into and out of the US with the release of the TIC flow report.

CHART OF THE DAY: ASX 200

Are we on the cusp of a third leg to the current rally or are we about to see a reversal off the range top again?

As you can see the market is within striking distance of the top of the recent range again. While that will make some traders nervous any move above 5,300 could be the signal for a strong rally.

In teh short term while above 5,217 the market looks okay.