SCOREBOARD: Beige haze

The Fed's beige book (a collection of anecdotal reports from business leaders) suggests that "national economic activity expanded at a modest to moderate pace,” through late November and December, which is a more optimistic report than what we saw through most of 2011. We've seen from other partial indicators that consumer spending has picked up and this was confirmed anecdotally in this report, "reflecting significant gains in holiday retail sales.” Manufacturing was seen to have expanded and demand strengthened for non-financial services. The main weakness noted was obviously in the residential and commercial real estate space, where activity remained sluggish. That said, financial institutions did note a pick-up in loan demand from business.

Not bad overall, but I can't say there was much of a market reaction to this report. Moves had been pretty muted prior and nothing changed post. Investors are still very cautious at this stage, after yesterday's moves, and this was evidenced by strong demand at Germany's €3.153 billion 5-year bond issue. It went out at a yield of 0.9 per cent (1.1 per cent last time) with bid/cover at 2.8 compared with 2.1 in December. Then across the Atlantic, demand for US treasuries was quite solid as well, with the 10-year yield falling a further 5bps (1.9 per cent) while the 5-year yield was down just under 3bps to 0.82 per cent. The 2-year yield was little changed at 0.23 per cent (-1bp.). Australian futures were up 3 ticks on the 3s (96.86) and little changed on the 10s (96.17) on a 5 tick range for both.

Elsewhere, Wall Street didn't have a bad session after yesterday's gains, but punters don't seem to want to extend it. The S&P500 closed basically flat (1,292) with energy stocks weighing heavy after a report showed US fuel inventories rose. This saw crude down 1.3 per cent on WTI ($100.9) and 0.8 per cent on Brent ($112.4). Otherwise, consumer goods and utilities were in the red, while basic materials, telcos and financials pushed higher. The Dow for its part closed down 13 points (12,449), while the Nasdaq added 0.3 per cent (2,711) and Australia's SPI is down 0.1 per cent.

In the forex space, the Australian dollar didn't do a great deal and is up smalls from 1630 AEDT yesterday at 1.0303. The euro is down about 46 pips or so to 1.2697, while the sterling is down 140 pips after trade data revealed a larger than expected trade deficit. Otherwise the yen is at 76.87, which is little changed. Finally, gold was up smalls ($1639), ditto silver, which was up 0.3 per cent while copper rose a further 0.9 per cent.

News and data otherwise was light. It was interesting to note that the German economy expanded at solid clip in 2011, rising by 3 per cent according to the statistics office, which comes after a 3.7 per cent rise in 2010 – the strongest growth since reunification. The thing is that stronger growth comes even with a contraction in the December quarter, which the stats office reckons will be around 0.25 per cent (crisis-driven). Then there was quite a bit of Fed speak. Lacker and Plosser (hawks) both appeared more optimistic on the economy than their peers; Plosser suggesting growth could be in the order of 3 per cent for 2012-13. Evans (dove) then said that interest rates should be around 0 per cent until the unemployment rate dips below 7 per cent or inflation rises above 3 per cent.

There is little in the way of data for our region until about 1630 AEDT when we see India's industrial production figures. Japan's machine tool orders are also due soon after. Tonight there are quite a few things worth watching for. Industrial production for both the EC and UK (Nov data) is due and then we have the ECB and BoE rate announcements (although no changes are expected). For the US, December retail sales are expected at 0.3 per cent and they are accompanied by business inventories/sales and the usual weekly claims numbers.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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