SCOREBOARD: Cliffside correction?

Approaching US budget cuts could trigger a correction to Wall Street's bull run, but for now the market's still well short of a real pullback.

US equities ended little changed on Friday night, capping off what was a sluggish week. The S&P started the week at 1517 and ended it at 1519 (up 0.5 per cent at the high and down 0.3 per cent at the low). There was mixed data and not much else, with lethargy and the US Presidents' Day holiday today probably accounting for the uninspiring session.

As to that data then, US industrial production slipped 0.1 per cent in January after a 0.4 per cent increase in December. The US Empire manufacturing index shot up to 10 from -7.7 and the preliminary February measure of consumer confidence rose to 76.3 from 73.8. Not too bad all up but not good enough it seems.

Fact is, the market really hasn’t done anything for a couple of weeks now, although that’s still well short of the correction many are talking about. In any case the US bull market is in its third year – corrections happen, but that doesn’t change anything. Maybe the correction will stem from the sequester cuts which kick in soon on March 1. My sense is that we might actually go over this cliff, but only for a month or so maybe. Hopefully they can time it to some electoral uncertainty in Europe – that would be much more dramatic after all, with crisis both sides of the Atlantic, and might even lead to a decent correction. As always, buy that dip if it comes. Truth is, I’m still quite disappointed that the fiscal cliff mark 1 didn’t bring more panic.

Anyway, looking elsewhere, we saw some decent downward moves in the commodity space with gold off $26 to $1609 on news that some large funds are selling down their gold holdings; copper fell 0.01 per cent and crude was off 1.5 per cent to $95.86. Then in the forex space, the Australian dollar is off about 60 pips to 1.0295; the euro is little changed at 1.3348 and the same with the British pound at 1.5507; while the Japanese yen pushed a little higher and sits at 93.668.

Actually, while we’re on currencies it’s worth noting that the Group of 20 statement pretty much came out as expected. They produced a statement in which they agreed that "we will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open.” But really all the flowery language means nothing – the underlying problem is that the Fed, the Bank of England and the Bank of Japan are printing money and until that changes there will be pressure for other countries to protect themselves or retaliate.

For instance, the US economy is growing at trend and is experiencing strong jobs growth. There really is no excuse for them to continue to print. It’s just laziness, as they don’t want to lift taxes or address the budget. But that comes at the expense of other countries. For mine that makes the US a currency manipulator. It’d be different if their economy was stuffed – but it isn’t. But that’s the loophole. According to the G20 it’s okay for countries to use monetary policy to shore up growth – nudge nudge, wink wink, eh eh...

So that’s the lay of the land at the moment, not a great deal going on. Everyone talking about a correction, unwilling push the market higher until we see resolution on that – but as yet nothing.

For the week ahead don’t forget it’s Presidents' Day tonight, and markets are closed. As to the ASX today, the SPI suggests a modest gain of 0.3 per cent.

Otherwise for the macro data out this week I’m not looking for anything view-changing. In Australia it's car sales today and the Reserve Bank's minutes Tuesday, with wage prices on Wednesday. Finally on Friday, the Reserve Bank Governor appears before the House Of Representatives Economics Committee. So there is a bit of Reserve Bank info, but we already know the view: on hold for now, but it won’t take much for them to cut – perhaps the sequester.

Otherwise, it’s still busy now regarding reporting season: we see BlueScope, Lend Lease, BHP Billiton, Fortescue and Bendigo Bank, among others, reporting.

In the US, we get the NAHB housing market index on Tuesday night; housing starts and PPI Wednesday night; and then we get the FOMC minutes on Thursday morning. Thursday night sees US consumer prices, initial jobless claims, the Philly Fed index and existing home sales.

Finally for Europe, we get current account tonight; construction work and the German ZEW on Tuesday and German CPI on Wednesday. Then in the UK we see the Bank of England's minutes, and with Mark Carney at the helm further substantial printing is a good bet. Again these are not decisions you can predict based on economic data flow or inflation – they are random political decisions.

UK employment is out Wednesday night and we see the European PMIs on Thursday. On Friday the key release is the German IFO survey and CPI.

Have a great week…

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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