SCOREBOARD: Ebb and flow

A modest pullback is unlikely to change Wall Street's underlying trend, while John Boehner dug in on budget cuts.

As I write, we’re looking at modest falls across Wall Street. The S&P is off 0.2 per cent (1508), the Dow is off 26 points (13,952) and the Nasdaq 0.3 per cent lower (3162) – but there wasn’t a lot of news or dataflow. In fact the only major dataflow came from Europe, where we saw German factory orders rise 0.8 per cent in December after 1.8 per cent all the month prior. That was it though.

Markets go up and down I guess, and the press is full of stories about the need for a correction. After all, there are plenty of people who’ve missed out on this rally and they’re most likely the ones talking about the need. Maybe it’ll come, but I’m not seeing anything that will change the trend materially.

Well, maybe one thing. John Boehner, GOP speaker of the house, said that he wants to go over the cliff unless Obama gets serious about spending cuts and reforms. Well, he didn’t quite say that – he said he would oppose any delay to the automatic budget cuts that would start in March. Boehner needs to direct his attention to helicopter Ben (chair of the Federal Reserve). With Bernanke printing money for Obama, the regime has no incentive to cut spending.

In Europe the session was mixed with German and French stocks hit hard (down 1.1 per cent and 1.4 per cent respectively). The fear is rising in Europe again following recent political scandals, and you can see this most evidently in the Italian and Spanish 10-year yields. Still well and truly below their peaks, the Italian yield was up 10 bps last night to 4.5 per cent, while the Spanish equivalent was about 4 bps higher to 5.42 per cent.

Elsewhere on the rates side we saw the US 10-year Treasury yields down about 4 bps to 1.96 per cent; the 5-year was off 2 bps to 0.84 per cent; while the 2-year is at 0.26 per cent. Aussie futures are about 4 ticks higher a piece, with the 3s at 97.2 and the 10s at 96.54.

In terms of other interesting moves, the euro is worth a watch following French president Franois Hollande's comment that the European Central Bank should adopt an exchange rate policy. Currency wars are heating up. He wants a lower euro, as he reckons it's stifling the recovery.

Since making those comments, the euro is off a big figure, down 60 pips to 1.3515 last night. Don’t forget that we get the Central Bank meeting tonight and any mention of the currency could see it lower still. Germany is opposed to any intervention, but you know, one voice and all...

Elsewhere in the forex space, the British pound was flat at 1.5667, while the Australian dollar was down another 30 pips to 1.0315. Finally for commodities, we saw small moves, with is flat at $96.63, gold up $4 to $1676 and copper off 0.7 per cent.

In regards to the Australian retail figures yesterday, they were quite a bit weaker than the market expectation of a 0.3 per cent rise. Now, as I have highlighted in these pages before, I don’t value the monthly Australian Bureau of Statistics retail survey as an indicator. It's next to useless and they have canned it before – they should do so again. But for those who think it does have value, then it contains a very alarming signal.

Consider that retail spending is down for the third consecutive month, and it has fallen in four of the last six months. This is 12 months after the Reserve Bank commenced the easing cycle. Now, we really shouldn’t be seeing such a result. Household incomes growth is robust, savings are high and 150,000 jobs were created last year. The unemployment rate remains low. With lending rates at their lowest since the 1960s, it doesn’t make sense. So why is spending so weak following the Reserve Bank's aggressive easing cycle?

Well, if you’re a fan of these figures (and remember that I’m not), it is highly unlikely that spending is weak. So the only answer that is logically consistent with what we know as fact, and that fits the supposed ‘puzzle’, is my hypothesis that this easing cycle has been counterproductive.

Put simply, the Reserve Bank's panic cuts are alarming people. It’s that simple. This is what happens when you slash rates with above-trend economic growth and a very low unemployment rate. People start to wonder what’s going on. They question reality. Remember that there are even people who actually think the economy is in a recession. In all seriousness, if Wayne Swan wants to lift confidence (and his election chances) he shouldn’t be so gung ho about the Reserve Bank cutting rates. The debate is killing this country.

At the very least, people who have used this data and other indicators like it to argue the case for rate cuts would have to admit one thing – distinct from causation. This easing cycle has been a complete failure. Indeed, retail sales growth is weaker now – 175 bps later. It was stronger when the Reserve Bank's cash rate was 175 bps higher. As was confidence and lending growth, by the way. The theory is there, the data is there, the evidence is there. So if it smells like a duck…

Today at 1130 AEDT we get the Australian employment figures for January. The consensus is that jobs rose by about 6000, with the unemployment forecast to rise 5.5 per cent. So far the labour market supports the fact that the economy is growing at trend. The unemployment rate is up only modestly, from 5.2 per cent to 5.4 per cent, and while the participation rate is lower, hours are elevated.

Jobs growth at 150,000 (higher ex-Newman effect) is slightly lower than trend. Just over half were full-time jobs. Then in the earnings space, we see companies such as Telstra, Tabcorp, News Corporation and Australand reporting.

Looking abroad, we get the European Central Bank meeting tonight, alongside German and UK industrial production figures. For the US, the key release are the weekly jobless claims.

Adam Carr is a leading market economist.

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