Dairy prices up; Fed hints but holds

Last night was the Global Dairy Trade Auction, where the Trade Weighted Price Index showed prices rose 3.5% compared to July, in the main due to higher prices of whole milk powder, rising to US$2,797 a metric tonne, sold by Fonterra. The data should help support the Kiwi as Dairy products are the nation’s biggest export and the ongoing US drought is helping to drive up prices. The Federal Open Market Committee concluded their 2 day meeting this morning and refrained from taking further stimulatory action for now at least. Eurozone and China PMI slowed again data showed, whilst in Australia, they also reported a contraction in manufacturing.

On completion of the meeting, the FOMC said that ‘economic activity decelerated somewhat over the first half of the year and so will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in the labour market’. The Fed Chairman Ben Bernanke held off from initiating any new stimulus, but did leave the door open for potential QE3 in September and confirmed that they will continue their Operation Twist program where they swap short term debt for longer term securities, whilst closely monitoring economic data. The Fed’s next meeting is on 12th September, they will give their updated forecasts on growth, unemployment, inflation and housing and so barring any serious upturn in economic conditions, it may be that meeting where we see further action taken.

In Europe, a report showed that the manufacturing Purchasers Managers Index (PMI) fell to 44 from 45.1 in June, the fastest pace of contraction in 3 years, as the report said that companies were focusing on cost cutting in the face of the decline and so was leading to job losses. It was a similar story in China, where manufacturing slowed from 50.2 to 50.1, its slowest increase in 8 months, although there at least, it is still expanding.

Finally, across the Tasman, the Australian Performance of Manufacturing Index (PMI) showed a further contraction as it fell 6.9 points to 40.3 in July hitting a 3 year low as the strong Aussie dollar and declining demand from China, dampened demand and slowed growth further.

In the currency markets, the majors were higher against the USD in anticipation of the Fed confirming more monetary stimulus, with the Kiwi and Aussie moving as high as .8140 and 1.0540 respectively. The Euro was also higher touching 1.2325. However, after Bernanke confirmed that no new action was being taken for now, the USD recovered as the currencies all fell sharply back to levels around where they were 24 hours ago. The NZDUSD is back at .8060, while the AUDUSD is now around 1.0450 and the Euro is now a cent lower trading around 1.2225. However, the Kiwi has remained higher against AUD at around .7720.

The RBA may need to cut further as manufacturing falls