SCOREBOARD: Debt charade

In a session devoid of meaningful data or even news flow, the US debt ceiling debate took centre stage. Now most people view an actual default as a low probability event. Indeed, as far as I can tell, both the Republicans and the Democrats have ruled this out. So everything else is political posturing and the best bet is there will be some deal at the 11th hour. I can't imagine any politician wants to be responsible for the consequences that would follow, including the increased polarisation of the electorate (which is already underway).
 
Markets are understandably nervous though (with gold and CHF hitting new records), and as we know, equities took a beating in the Asian session yesterday, particularly in Australia. The same negative sentiment was clearly evident in US and European trading, but moves weren't quite as bad as those recorded here and in fact the Dax managed modest gains ( 0.3 per cent). Otherwise the FTSE was down 0.2 per cent and the STXE 600 was off 0.3 per cent.
 
On Wall Street, the S&P finished 0.6 per cent lower (1337) having been down 1 per cent at the low. Telcos, healthcare and consumer goods were the key deadweights although all sectors (bar utilities) took a hit. Outside of debt issues, the earnings season is shaping up as a cracker so far. A number of firms reported last night and most continued to post positive growth surprises. So far, and with 25 per cent of firms having reported, 83 per cent have posted positive growth surprises. The Dow was then off 76 points (12592), while the Nasdaq fell 0.6 per cent (2842). The SPI bucked this trend and rose 0.4 per cent, perhaps correcting after Australian stocks were oversold yesterday.
 
I mean, it's not like commodities had a great session. That is outside of gold, which hit a high of $1624 yesterday morning, but has since eased to $1614. Elsewhere though, the screens are red. Crude is off 0.7 per cent on WTI ($99.16), Brent is down 0.8 per cent ($117.7), copper is off 0.1 per cent and softs are generally weaker on the CRB.
 
Rates otherwise did nothing (really, what do you do if the US defaults?) and yields on the major t-notes were little changed (with the 2-year at 0.41, the 5-year at 1.52 per cent and the 10-year at 3 per cent). For Australia, futures were up a tick or two to (95.62 on the 3s and 95.08 on the 10s). Forex wasn't that much more exciting. The Australian dollar was up 17 pips on an 80 pipish range, the euro was 10 pips higher on a similar range to the Australian dollar, the British pound was down 6 pips to 1.6298 and the yen is down to 785.28 from 78.47.
 
A quick word on Australian producer prices before getting into the day ahead. There is no question that upstream price pressure has accelerated. Headline PPI has risen at its fastest pace over the last two quarters since 2008 and that's the same for intermediate and preliminary prices – it's through the whole chain. Now some people are trying to talk the PPI down, but this is wishful thinking. That's not to say that this week's CPI is guaranteed to be high as a result of the second quarter PPI – the quarter-on-quarter correlation isn't that good. But the PPI is an indicator that price pressures are rising at a fairly solid clip, and that these prices are being passed on. There is evidence of margin compression in the manufacturing space, sure, but it's not that manufacturers aren't, or can't, pass on price hikes. They are and they can, but they are passing them on at a slower, but still rapid, pace: 8 per cent in the last two quarters alone to be almost 10 per cent higher annually. I reiterate my view that the downside risks to growth are much exaggerated and that the upside risks to inflation are being overlooked.
 
For Australia today we get a speech from the RBA governor to the Anika Foundation on the economy (1305 AEST). Prior to that and at 0845 AEST, the Kiwis put out the trade balance. 

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.