SCOREBOARD: Berlusconi break

Once again, Italian bond yields spiked higher overnight. The 2-year rose to 6.38 per cent from 5.98 per cent and the 10-year was up 11bps to 6.76 per cent (euro era highs and the highest since the mid-90s), yet stocks rose and even the euro was stronger (up 60 pips to 1.3821). Interesting moves to say the least, and much of it seems to be driven by Italian politics. On this front, the news was mixed – Berlusconi lost his majority in parliament (though passed the 2010 budget) and looks set to resign after new financial stability laws are passed (a vote to be held next week). This was certainly greeted with some relief in the market, although it's difficult to see anyone ruling with a majority at this point. Fresh elections may be required early next year, which of course would throw in more uncertainty, although the press may be too absorbed by the spectacle of Berlusconi's farewell party to care that much.

Another element boosting sentiment was stronger-than-expected export growth in Germany. The consensus was for a fall of 0.8 per cent in September, yet exports rose 0.9 per cent to a new record, following a 3.2 per cent increase in August. I'm confused here. Certainly this is strong growth, at odds with those production numbers we saw yesterday. At the very least, it highlights why I think it is foolish to jump the gun on a European recession. Growth is slowing, but there is a huge question mark over the magnitude.

In any case, European stocks saw a decent bid with the Dax up 0.6 per cent, the Cac up 1.3 per cent and the FTSE up 1 per cent. On Wall Street, the S&P closed 1.26 per cent higher (1,276), with financials, tech and energy leading the charge. As mentioned, markets were buoyed by news that Berlusconi was resigning and even commodities pushed higher – WTI up 1.3 per cent ($96.7), Brent up 0.5 per cent ($115), copper rose 0.2 per cent, silver was 0.1 per cent higher and gold fell $13 from 1630 to $1780), with $11 of that on news of Berlusconi. Otherwise, the Dow was 109 points higher (12,177), the Nasdaq rose 1.2 per cent (2,727), while Australia's SPI pushed 1.3 per cent higher (4,337).

These are good moves, but we need to be very cautious. Already European banks appear to be offloading sovereign debt, banks in Asia are talking about the possibility of a liquidity crunch as European banks pull lending in order to meet capital requirements (recall that banks said they would shrink balance sheets rather than raise new capital in this environment) and that Italian bond yield isn't coming down as yet. And at the root of all this evil stands a bunch of useless European politicians.

As for rates, they traded within a comparatively narrow range, with the yields on the 5 and 10-year T-notes up only 2bps on a 5-6bps range. The 2-year sits at 0.24 per cent which is up almost 1bp. Australian futures haven't done much so far, the 3s sit at 96.39 and the 10s at 95.70 (down 3 ticks) with ranges around the 8 tick mark.

In other news, Fed voter Charles Plosser said that the Fed should adopt an explicit inflation target and not have an unemployment target. The reason for this is because monetary policy can be used to control inflation but not unemployment over time. He also noted that any talk of a nominal GDP target is a sly way of saying you want higher inflation.

In the UK, industrial production was flat in September, 0.1 per cent expected, although the August print was revised up to 0.3 per cent from 0.2 per cent. Manufacturing production was stronger-than-expected, rising 0.2 per cent compared to forecasts for 0.1 per cent.

Looking at the day ahead, we get Westpac's consumer sentiment index for November. While no one formally forecasts this series, you could make a reasonable argument either way as to why confidence would improve, or not. Doesn't really matter that much though; confidence has been below average for a while, yet spending on some key discretionary items has been very strong. So for instance, household goods like furniture and electronics are literally booming, spending on SUVs are close to records and we know that Australians are going overseas in large numbers. We also eat out a lot and services growth is strong. These are not the actions of worried or cautious consumers.

Otherwise we get home loans at 1130 AEDT. Loans have increased over the last five months by an average of 2.5 per cent per month ( 1.5 per cent ex refinancing). That's a strong rebound and of course predates the RBA's rate cut (just one more reason why it was unnecessary).

Looking abroad, we get Chinese inflation data at 1300 AEDT, and then we get UK trade numbers tonight.

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

Follow @AdamCarrEcon on Twitter.