SCOREBOARD: Crude manouevres

Big healthcare and consumer falls on Wall Street offset a strong commodities rally, while risk was on in Europe.

US stocks did little overnight, staying stuck around zero, with the S&P500 flat (1578), ditto the Nasdaq (3269), although the Dow is off 43 points (14676). The session probably would have been worse were it not for a strong rally across commodities overnight. Crude spiked 2.6 per cent ($91.49), copper 2.3 per cent and gold rose $21 to $1430.

As to why? Who knows, it just did is the best I can come up with. That nearly all commodities have been oversold was obvious, but why they retraced a bit last night is anyone’s guess in what is increasingly a highly opaque market. Anways those commodity price gains saw energy stocks shoot up over 1 per cent and basic materials were 2 per cent higher. Big falls in healthcare, consumer stocks and telecoms offset that though.

Over in Europe though the bid was on! We saw the Dax shoot up another 1.3 per cent, the CaC was 1.6 per cent higher and the FTSE rose 0.4 per cent. The catalyst was some solid earnings reports from large European companies – or just positive corporate news flow. So for instance Credit Suisse reported a sharp lift in first-quarter profit, Ericsson was up on strong US sales and there was upbeat news from European car makers like Volkswagen. 

This news flow offset a modest fall in the German IFO survey and so investors largely brushed it off. It’s a good survey though, but the thing is falls were small – the business climate index was only off 2 points to 104.4 and that score is anyway above the average of 101.9 (an average of 95 from 2008-2010). So the survey is still upbeat.  As to the US data we saw durable good drop 5.7 per cent in March, offsetting last month’s 4.3 per cent gain. ‘Core orders’ were better, rising 0.3 per cent after a 1.2 per cent gain last month. So that still points to decent investment in the US and a decent growth profile.

So with all that to contend with, US Treasuries did nothing, the 10-year was off maybe a basis point or so, 1.7 per cent, the 5-year is at 0.69 per cent and the 2-year at 0.23 per cent.  Then finally in the forex space we saw the Australian dollar up 30 pips to 1.0280. Euro was up smalls to 1.3014 - ditto sterling at 1.5268. Yen sits at 99.55, just below the US and Japanese target of 100.

Not much else apart from that so a few brief words on yesterday’s CPI. The quarterly change was lower than expectations which is great and annually headline inflation is smack bank in the, middle of the target at 2.5 per cent.  Now it’s true to say that the carbon tax has inflated that number, but the impact is actually not that great. At the time I thought it would be higher, as it turns out though we’re looking at a total impact of 0.4 percentage points for the September quarter. This means that headline inflation in the absence of that tax is probably between 2 and 2.25 per cent.

Core inflation could be little different though as these measures stripped out the impact of the carbon tax. Core measures show inflation in the middle of the band, (just below) so it’s not true to say that inflation is the lowest in 30 years. This is highly misleading.

Anyway the carbon tax isn’t even the largest effect – it’s done and the impact was modest it seems. The most important thing we should note is that domestically sourced inflation pressure (60 per cent of total CPI) is accelerating. This index shot up 1.3 per cent in the quarter to be 4.2 per cent higher annually – the highest in three years.  A prudent central bank should be watching this with some concern.  The truth is headline and core numbers are being dampened by the temporary effect of the Australian dollar and some of the lowest food price inflation on record. Neither is sustainable.

On the flipside, I read one economist on Twitter who said that we should ignore this high domestic inflation though because it’s all health, housing, education etc. These are foolish and misleading comments because those inflation pressures are not temporary, they are persistent and consistent – and are not due to government charges.  It would therefore make no sense to look through them. Why would we have inflation numbers at all if that was the case?

The bottom line is that we have inflation within the target band – that doesn’t mean we have low inflation though. Fair to say that nor do we have high inflation. That said these figures are inconsistent with interest rates that are the lowest on record, and they certainly don’t support the case for further rate cuts. Rate should be on the looser side of neutral, sure, but not this much. Inflation is telling you what the GDP and unemployment numbers are telling you: growth is at trend.

Moving on, our markets are closed obviously for the ANZAC Day memorial – and lest we forget.  For data tonight we see UK GDP and in the US only jobless claims.


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