SCOREBOARD: Bulls in bearskins?

Price action was choppy overnight as a run of global data failed to impress. There seems to have been some initial concern about the Japanese GDP figures (Q2) out yesterday morning, showing growth at 0.1q/q per cent rather than the 0.6 per cent that was forecast. Nevertheless the impact on markets was ultimately marginal. Yen actually appreciated after the figures, which shows you the extent to which currency markets were concerned by the data and equities were only off smalls.

There are a few reasons for that. Firstly, the numbers are volatile. It would be unrealistic to expect quarter after quarter of growth around the 1 per cent mark. This is not how things work and one soft number after two very strong quarters just doesn't mean anything. Average growth is still quite strong. This is especially the case when much of the weakness comes from the mix of trade data and inventories. So exports, with strong growth of 6 per cent q/q, were slightly weaker. Imports, with strong growth of 4.3 per cent, were slightly stronger. All this meant the net export contribution was half what it was in Q1. Added to that, a drop in inventories also detracted from growth. So realistically the numbers weren't so bad.

It's akin to worrying about US GDP growth slowing because import growth is strong (strong import growth dampens GDP remember). Obviously that would be completely idiotic given strong import growth reflects strong demand and, as you've probably heard before, strong demand doesn't equal weak demand. True story. In any case I doubt many economists are looking for a serious contribution to global growth from Japan which of course would explain why the market reaction was so subdued.

Fair to say it certainly didn't help with risk appetite though and bonds around the globe rallied – aided by lacklustre data from the NAHB (showing the housing index dipping to 13 from 14) and the NY Fed showing manufacturing activity rose by less than expected (empire manufacturing at 7 from 5, average 10). The US curve bull-flattened as the 10-year yield dropped to 2.58 per cent (-9bps) which is a 16 month low, while the 2-year fell about 4bps to 0.49 per cent (making new records). The 5-year yield was at 1.39 per cent or down 7bps. Now remember the economic information content of the yield curve is much diminished in a world of ultra low cash rates. Many people erroneously believe that the bond market is telling you a double dip is around the corner or that deflation is knocking at the door. This is wrong.

The only thing the bond market is telling you is that investors are cautious. Concerned about the outlook, though hardly believers in deflation or double dips and that cash rates are ultra low. I find all this talk about double dips and deflation very interesting. For an event which even the biggest bears (the credible ones anyway) apparently only give a 10 to 25 per cent chance of occurring, we seem to spend an awful lot of time talking about it. Thinking of it another way, even the bears supposedly put the chance of continued economic recovery at 75-90 per cent. Bulls in bearskins? Our own (Aussie) futures didn't really do much then. 3s and 10s were up between 2 and 5 ticks on a 5/6 tick range. 3s are at 95.48 and 10s at 95.10.
So equities around the globe were largely flat. Stocks in Europe finished between 0 and 0.02 per cent higher with US markets not too far off that. The S&P500 was 0.01 per cent higher at 1079, the Dow was off 1 point to 10302, while the Nasdaq rose 0.4 per cent (2181). Key outperformers included basic materials, technology and consumer goods, while healthcare, telecommunications and financials weighed. In Oz, the SPI ended up 0.05 per cent (4422).

As for FX and commodities we saw a bit of US weakness overnight with AUD up 38pips to 0.8981, EUR at 1.2827 (13pips), GBP at 1.5663 ( 42pips) and Yen strengthening further to 85.37 (from 85.91). On commodities, oil is down 0.4 per cent in NY, copper rose 0.9 per cent and gold was up $10 to $1225.

Today's data includes the RBA's minutes at 1130. As I mentioned yesterday, I doubt we'll get much from these minutes. We know the Bank's view as we received the Statement on Monetary Policy a few days after the meeting. As we learned then, the view is fundamentally unchanged and the RBA maintains an upbeat view. Tonight watch out for the German ZEW survey, US PPI, housing starts and industrial production.

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