SCOREBOARD: Crude moves

Oil prices continued to fall overnight, with no obvious explanation for the decline.

The tumble in crude prices continued overnight, WTI down another 2.9 per cent in a session where commodities otherwise rose. Something odd is going on. Copper was up 2.2 per cent, gold rose smalls ($1773) and even iron ore put on another 4-5 per cent, which means it has now bounced back something like 25 per cent since its trough of around $88 – dizzy? I bet. It pays not to panic, people.

Anyway, oil. There’s talk of options expiry and computer glitches etc. But this is day two. That it was sparked by nothing tells me it isn’t some fundamental problem or weak global growth, not that global growth is weak. But I am as yet unable to find a good cause for what’s going on. In the absence of that – Bilderberg.

Suffice to say it weighed on stocks last night and energy stocks were key underperformers. Overall, the S&P500 was only off 0.1 per cent though - weakness in energy stocks partially offset by gains in consumer goods, healthcare, telcos and even tech stocks eked out modest gains (the Nasdaq itself was down 0.03 per cent to 3177). The Dow otherwise managed to end in the black, just, rising 0.09 per cent to 13564.

Over in Europe, stocks had a disappointing session with the Dax off 0.8 per cent, the CaC down 1.2 per cent and the FTSE 0.4 per cent lower. And that’s with further falls in Spanish and Italian bond yields – in fact Spain managed to sell €4.57 billion of short-term debt at lower rates, the 12-month bills going out at 2.83 per cent compared to 3.07 per cent last month. Similarly the German ZEW survey showed a solid improvement in sentiment, the index rising to -18 from -25 (average is -23), although the current situation index fell to 12 from 18 (average 22). Euro was then down about 40 pips to 1.3045 while the Australian dollar was little changed at 1.0454.

Finally for the price action, and in the rates space US treasury notes ended little changed and on narrow ranges. The 10-year yield moved within a 4 bps range and ended a touch higher at 1.814 per cent while the 5-year was a little higher as well at 0.70 per cent. The 2-year yield was up almost 2 bps to 0.262 per cent. Australian futures were off a tick or so with the 3s at 97.39 and the 10s at 96.755.

Before looking at the day ahead it’s worth a quick word on the Reserve Bank minutes yesterday. The minutes contained a clear signal that the bank was prepared to cut again I think that much is clear. But, and we’ve been where before, they suggested they needed to see a significant deterioration in the outlook. I initially read that as meaning they would need to see data actually deteriorate - ie unemployment lift, employment drop, etc etc. A number of things decline and not just a bit, but by a significant magnitude and on a sustained basis. For mine, that what a reasonable central bank would do

Thinking more on it, and if history is any guide, that isn’t the case though. Recall earlier this year when the bank suggested they would need to see demand conditions ‘weaken materially’ before they cut again. Demand conditions didn’t weaken and in fact they accelerated sharply – yet the RBA still cut rates. Looking back I don’t think anyone could argue that the economy would be worse off if the RBA hadn’t cut rates. The economy would still be growing well above trend.

Then as now, it still seems that the news flow will be the key sign post for a rate cut. Because it is the news flow that will determine perceptions of the outlook. If it is sufficiently bad in the lead up to the October meeting, we will get a rate cut. That’s because the board will perceive that the outlook has deteriorated significantly, regardless of what the hard data shows – just like earlier in the year. Just like now actually. I mean there is this perception that the global economy has lost significant momentum – but this just isn’t true.

With that in mind, it doesn’t look likely that we’ll get an October cut at this point, what with the 25 per cent spike in iron ore prices, the lift in global stocks, etc etc. That is, if board members are going to be reasonable about it and in all sincerity, I’m not convinced on that point.

I would implore them, for the sake of the nation, to not frivolously waste further policy ammo. They should save it until something bad does actually happen. Look at the mistakes they (the board) made earlier this year – they should learn from that if they have the humility to do so. The fact is, there may come a point where we need a considerable amount of stimulus. It is foolishness beyond anyway measure to waste that on an ever elusive bogeyman (any one, pick one). Unfortunately though, the RBA obviously has its finger on the trigger. History suggests it won’t take much to spook them into cutting.

Looking at the day ahead, there is very little of interest until this evening when we get US housing starts for August. Housing indicators have turned generally and things are on the up which is all good news of course. Existing home sales follow soon after. Not much else otherwise. The Bank of England puts out the minutes to their recent meeting and we also see eurozone construction spending.

That's about the lot, 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.

@AdamCarrEcon on Twitter.


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