SCOREBOARD: Cliff tease

Wall Street made some gains overnight amid conflicting reports of progress made on the US fiscal cliff.

After an early sell-off, Wall Street has put in a decent performance all up although the Nasdaq isn’t sharing in those gains – it's firmly in the red with a fall of 0.4 per cent to 2982 so far. We didn’t really get much in the way of news on the fiscal cliff, which is the primary driver of things at the moment, and in any case the news that was out was mixed. One news service reports that Obama is optimistic a deal will be reached within the week. Another is reporting no progress and widening divergences.

It was probably a run of positive growth news that pushed the market higher. People are so used to bad news that anything that shows the opposite is true usually gets a positive reaction.

So we had three pieces of information last night, none of it tier one but useful nonetheless. First up, the ISM’s services index actually rose to 54.7 in November from 54.2, despite an expectation for a small decline. This was a great outcome considering distortions provided by storm activity.

Similarly, US factory orders rose 0.8 per cent in October after a 4.5 per cent gain the month before. We also saw a 118,000 lift to the ADP employment estimate. This was weaker than the 125,000 forecast but remember that the result was impacted by the east coast storms. So, the result doesn’t really mean a lot, but will probably leave forecasters happy with the 100,000 estimate for payrolls due on Friday.

As I write, the Dow is outperforming with an increase of 0.9 per cent to 13069, while the S&P500 is trailing 0.4 per cent to 1412.

European markets had a similar session to the S&P, with the major indexes up around 0.3 to 0.4 per cent. Of more interest was a decent spike in Spanish bond yields.

This follows what is being described as a disappointing bond auction, although it wasn’t all that bad. Spain sold €4.3 billion, which was within the target range of 3.5 to 4.5 and at a lower yield than last month – 5.29 per cent from 5.46 per cent. Nevertheless, yields shot higher after and in the secondary market, the Spanish 10-year yield rose 15 bps to 5.4 per cent.

Elsewhere on the rates side, we saw treasury yields down about 3 bps on the 10-yr to 1.58 per cent. The 5-year is at 0.6 per cent, while the 2-year sits at 0.25 per cent.

Not much more action in the forex space either – the Australian dollar is little changed at 1.0464, the euro is off about 30 pips to 1.3080, while sterling and yen didn’t do a lot and sit at 1.6098 and 83.35 respectively.

Before getting into the day ahead it’s worth a quick comment on the GDP figures yesterday. Nearly all the press I’m reading on it is very negative, and excessively so.

I would simply highlight to readers that numbers bounce around and that at worst the economy is still travelling at trend pace.

I went through a lot of the detail yesterday and there were some big outsized moves on the downside, which will probably be corrected next quarter – they were huge one-offs. Underlying growth is above trend and if you smooth out some of the volatility of the seasonally adjusted estimates this is easy to see.

Don’t forget that many of the economists and journalists making noises about low nominal growth, the decline in the terms of trade, and finding whatever other doom and gloom they can were singing this song last year as well. Subsequent data showed they were wrong then and they were left red faced – plenty of egg on faces. Don’t let these people spook you, they have a terrible track record.

Also worth noting is a speech from the deputy governor of the Reserve Bank, Philip Lowe. He was talking about normal, or what is normal for the Australian economy. It was an interesting speech, which contained much food for thought.

Two important aspects were the Reserve Bank’s changed view on the consumer. Lowe rightly suggested that it probably wasn’t right to regard consumers as being cautious, but rather prudent.

I have made the same point myself – it has always been an absurdity to describe consumers as cautious when we are going overseas in record numbers and buying a record number of cars – SUVs to be precise. This is not cautious behaviour, just a change in consumption patterns.

The other interesting aspect was on the cash rate. He offered three reasons why the cash rate is lower now that would otherwise be the case. And suggests that the cash rate isn’t at emergency levels now. So he noted that interest rates would in fact be higher – 150 bps higher – if banks hadn’t been expanding net interest margins. He also argued that lending rates are probably lower than they otherwise would be because of the high Australian dollar and the fact that the credit boom is over.

So for Australia today, the SPI suggests the All Ords will rise 0.3 per cent. Otherwise, employment is the key data release for Australia. The market is looking for a flat outcome in November following a rise of 11,000 in October. The unemployment rate is forecast to rise to 5.5 per cent from 5.4 per cent.

Tonight we get the breakdown of eurozone GDP for the third quarter and German factory orders, while both the European Central Bank and Bank of England meet, though no changes are expected.

Have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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