Scoreboard: Earnings drag

Wall Street retreated overnight on disappointing earnings, while the Australian dollar slipped to a three-year low on the back of weak jobs data.

Stocks were off on both side of the Atlantic overnight, on a combination of disappointing corporate earnings and perhaps some profit taking. It wasn’t really as if there was much bad news out and about. Sure, those earnings – from Goldman Sachs, Citi, Best Buy and so forth – weren’t great, but the general macro flow was still pretty good. New jobless claims, for instance, were low again in the week to January 11 at 326k from 328k.

Basically, new claims continue to point to strong jobs growth. Similarly, the Philly Fed index rose to 9.4 in January from 6.4, although the NAHB housing market index slipped to 56 in January from 57. None of it is really a strong catalyst for a turn in sentiment. To be fair, losses were minor. With about an hour or so left to trade, the S&P500 is off 0.2 per cent (1845), the Dow is 78 points lower (16403), while the Nasdaq is flat (4214). Nothing earth-shattering and that the case in most other markets as well. Commodities for instance were weaker, but moves weren’t noteworthy: crude was off 0.4 per cent on Brent and 0.2 per cent on WTI ($105.6 and $94 respectively). Similarly in the metals space, with copper 0.5 per cent lower and gold up a few bucks to $1241.

The more interesting price action for the session was in the rates space: the US 10-year bond was yield down to 2.84 per cent from 2.89 per cent. Five basis points may not seem like a big move, but in this environment it is noteworthy. Especially in a session devoid of major hard hitting dataflow. Inflation figures were out certainly, but these actually showed inflation accelerating, admittedly of a low base, while core inflation was unchanged at 1.7 per cent. Closer to the top end of the target. I suspect the bond rally was in part driven by a speech Bernanke gave overnight. In it he defended quantitative easing and stated that it had been a huge success. He noted that he didn’t see any evidence of asset bubbles or financial instability more broadly, although it has to be said he didn’t see the GFC forming either.  

Similarly, he noted that the hyper-inflation that ’many predicted’ didn’t materialise; implying fears over quantitative easing were misplaced. This is a very disingenuous statement. At the time, Bernanke and others were warning of deflation. The retort was that the hysteria over deflation was wrong and that inflation would lift.  This remains the correct analysis. It's only recently that inflation rates have subsided from well above target in some cases.  It’s quite foolish then for Bernanke to say what he did. But it does give an insight into the delusion of central bankers, which is why bonds rallied.

Apart from that, it’s worth noting that the Australian dollar sits at 0.8814, which is almost a full cent lower than at the same time yesterday morning and a three year low. Most of that drop occurred after the weak employment report yesterday, although the figures don’t look as weak as the headline suggests. I wouldn’t say the labour market is healthy, but it isn’t weak either. The best characterisation of the labour market is one of caution. The important thing to note is that there is no job-shedding occurring, which is why this market can’t be viewed as weak. We’re not really seeing a lot of hiring either which to me is merely a symptom of the overall business psyche - unsure, uncertain, even afraid.

There were a few other interesting bits and pieces. German regulators have said that the manipulation of currency markets and precious metals is worth than the Libor-rigging scandal, which the head of Germany’s financial supervisory authority said was particularly serious. So much for free markets!

Looking at the day ahead, there isn’t really much macro data out for our region, so we wait for tonight’s session.  The key data will include US industrial production, housing starts, and the University of Michigan’s consumer confidence survey (for January).  

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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