SCOREBOARD: Chinese stimulus

Yesterday's stronger-than-expected Chinese GDP data, in conjunction with a decent Spanish bills auction, saw risk appetite improve further overnight. Spain sold off almost €5 billion in bills at sharply lower yields than in past auctions, with 12-month bills going out at a yield of 2.049 per cent from 4.05 per cent previously, and 18-month bills going out at 2.399 per cent from 4.226 per cent previously. Bid to cover was strong in both auctions at 3.54 and 3.23. This result saw another fall in Italian and Spanish spreads to bund with the Italian 10-year yield now at 6.5 per cent (from 6.62 per cent) and the Spanish yield down to 5.13 per cent from 5.18 per cent.

So far so good, and there looks to be a thaw underway more generally through the market – it's tentative sure, but it's underway. Except, that is, in the Treasury market. Having generally been subject to modest selling pressure through the European session, the major t-notes reversed on the US open. They continue to push higher as I write, with the 10-year yield down 3bps to 1.851 per cent and the 5-year down about 2bps to 0.78 per cent. Even the 2-year was off 1bp or so to 0.21 per cent. Aussie futures look to have followed suit, with the 3s up a few ticks to 96.81 and the 10s up just under 2 (96.18).

Elsewhere though it was risk on and commodities especially got a solid boost following the better Chinese data, and the solid evidence the country has avoided a hard landing. Added to that, German economic sentiment improved sharply in January, with the expectations index rising to -21.6 from -53.8 (average 22), while the current conditions index rose to 28.4 – which is well above the average of -15. Whatever your view might be, this result certainly confuses the recession picture. It's not usual to see improving current conditions and a sharp lift in sentiment (even noting that it's off a low base), in the midst of recession. We'll see.

In any case, WTI has shot up some 2 per cent so far to sit at $100.7. Copper has put on a further 2.6 per cent, silver is 2.1 per cent higher, while gold is little changed from 1630 AEDT. These moves have seen equities push higher, although Wall Street later faded a bit. The S&P shot up at the open, and was up about 1 per cent at the high but since then, the index has come off such that it closed 4.58 points higher (1294). Energy, healthcare and industrials were the key outperformers although most sectors had a modest bid. The Dow then ended up 60.01 points to 12482, the Nasdaq is 0.64 per cent higher (2728), while the SPI is off 0.2 per cent (4179), following a strong performance in the Aussie market yesterday. European markets had a better session of it, with the Dax up a strong 1.8 per cent, the CAC not too far behind at 1.4 per cent, while the FTSE was up 0.7 per cent.

There's not much else to tell you really. Inflation in Europe doesn't seem to be getting any better, with the falls in the annual rates masking what were solid increases month-on-month. So in the UK, CPI rose 0.4 per cent to give an annual rise of 4.2 per cent. This is down from 4.8 per cent the month prior but it's unlikely, given the sharp acceleration month-on-month, that inflation pressures have really moderated that much. Don't forget the substantial base effects influencing UK CPI – including VAT increases etc. As these drop off, the annual headline rate will fall. Moreover, I do expect momentum to ease a tad, temporarily, following the decline in commodity prices. But I'm not looking for a drastic easing, CPI will by and large be sticky in my view. Core CPI didn't change much, the annual rate was down to 3 per cent from 3.2 per cent. In Europe, CPI rose 0.3 per cent in the month to be 2.7 per cent higher annually, again, well above target.

Turning to the US, the only data of note was the Empire State manufacturing index which rose to 13.5 from a revised 8.2 (the average is 9.9).

Looking at the day ahead we get Westpac's consumer sentiment survey for Australia at 1030 AEDT, and it's not usually forecast but an 8.3 per cent fall in December suggests we may get some recovery in January. The ABS then release motor vehicle sales at 1130 AEDT. Tonight it's worth watching out for US industrial production (for December) and the producer price index (also for December). Other than that we only get UK employment 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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