The Dow Jones crossed the psychologically significant 10,000 mark this week as investors continued to embrace risky assets. Bulls cited the possibility of a 20,000 Dow in the years ahead. Bears reminded optimistic traders that the Dow first crossed the 10,000 mark more than 10 years ago on March 29th, 1999, and has made little progress since.
In reality, the Dow Jones and its index value is infinitely less important as a measure of equity wealth than the S&P 500 index, as the Dow includes only 30 stocks and is price-weighted, favoring stocks with a higher nominal share price. Nevertheless, for the sake of investors' savings and pension funds, it is good news that stock prices continue to recover from March’s lows, however their indices are measured.
Better than expected earnings news from JPMorgan Chase (NYSE:JPM) and Intel Corp (NASDAQ:INTC) helped equity sentiment whilst the dollar’s continued decline and low deposit rates encouraged investors to move out of cash. Analysts also suggested the weaker dollar would boost the overseas earnings of US companies with global exposure enhancing revenues.
Federal Reserve Governors Past and Present Give Mixed Signals on Rates
Federic Mishkin and Ben Bernanke sang from different monetary policy hymn sheets this week. Mishkin, who served as a Fed governor from 2006-2008, commented, “there are still a lot of problems in the financial sector that are going to take a long time to work out”. Mishkin also predicted years of “slack” in the economy and growth insufficiently robust to require short to medium term monetary tightening. Bernanke meanwhile voiced concerns over the growing threat of inflation and implied he was ready to tighten rates as soon as the recovery took hold. Bernanke also confirmed policy decision-makers were mulling over stimulus exit strategies in relation to the hundreds of billions of dollars injected into the banking sector over the past year.
The lack of clarity reflects deep uncertainty within the Fed and leading economists, following the unprecedented stimulus and monetary easing efforts. The Fed clearly doesn’t know with any degree of certainty the long term impact its recently executed policies will have on future inflation, equity prices, demand and the dollar.
UK Unemployment Increases, Though at Slower Pace
New jobless claims rose at their slowest pace in over a year during September, giving vague hope that the jobless total may peak earlier than previously expected and before next year’s election. 20,800 more jobseekers' claims were submitted than in the previous month, against a consensus forecast of a 25,000 increase. September’s claims pushed the claimant rate to 5.0%.
Graph: Jobseeker’s Allowance – claimant count up 20,800. Source CESI
Graph: ILO Unemployment. Source: CESI
Despite the headline increase in unemployed numbers, the total of young unemployed actually fell 1,000 to 946,000.
Though the pound appreciated with traders reacting to the better than expected data, David Blanchflower, a former member of the Bank of England’s Monetary Policy Committee, brought optimists back to earth, suggesting the latest unemployment figure for the young was just the “lull before the storm”. Blanchflower highlighted the August data would not have captured recent school and college leavers, many of whom would have failed to secure employment after the summer.
Also in the UK, price inflation eased in September compared to a year ago, as energy prices continued to stabilize relative to the 2008 spike in fuel costs. The consumer price index stood at 1.1%, a four year low.
Graph: Vacancies. Source CESI
Gordon Brown Responds to Tory Fiscal Plans
The Prime Minister mocked Tory fiscal and monetary policy, suggesting Conservative plans to slash public spending and reverse the quantitative easing program would jeopardize the economic recovery and prolong a deep recession.
Brown’s comments followed a statement from David Cameron that warned the Bank of England’s £175bn QE policy would cause inflation. Cameron also criticized the government’s handling of the budget deficit, suggesting the current level of borrowing would cripple the nation with debt for decades.
In an additional effort to tackle the debt, Labor have announced plans to sell-off £16bn of government controlled assets including the Tote, Royal Mint, Met Office, the student loan portfolio and shares in the Channel Tunnel. By ‘sell-off’, Labor of course means ‘privatize’, the Thatcherite policy that Labor found so abhorrent 20 year ago.
Economics Body Predicts UK Interest Rates At 0.5% until 2011
The Centre for Economics and Business Research (CEBR) has predicted UK rates will stay at the historical low of 0.5% through 2010 and into 2011. The CEBR also forecasts rates won’t touch 2.0% until 2014.
If proved correct, the low rates would put sustained downward pressure on Sterling, making Euro parity inevitable. It would also increase the possibility that Sterling’s 2008 low against the dollar of circa $1.35 could be revisited if the Fed increases US rates earlier and more aggressively than in the UK.
British tourists hoping to visit Europe or the US will hope not, but anyone with a variable mortgage will be keeping their fingers crossed for rates that stay lower for longer, in line with the CEBR’s revised forecast.
The graphs below show the base rate since the turn of the decade and for reference - a basic chart of the FTSE 100 index over the same period.
Graph: UK Base Rate 01/01/2000 – Present Day. Source TradingEconomics
Graph: FTSE 100 Index 01/01/2000 – Present Day. Source TradingEconomics