SCOREBOARD: Euro vision

Markets were subdued overnight as investors fixed their gaze on the ECB's policy meeting.

Price action was relatively subdued last night as punters await the ECB’s decision tonight and then payrolls on Friday. For equities then, the major European indices were mixed – the Dax up 0.5 per cent, the CaC 0.2 per cent , while the FTSE fell 0.3 per cent. Most of the news flow was negative, with the European services PMI revised down in the final August estimate. That naturally sparked alarmist headlines suggesting the European depression deepened etc (cue scary music) when the fact is the downturn is light.

More likely than not, Europe is either at or close to the trough and indeed the Italian PM, Mario Monti suggested as much last night. At least for Italy. He’s certainly a happy chap that bond yields are coming down and last night the 10-year fell a further 15 bps to 5.43 per cent, while in Spain the 10-year fell 17 bps to 6.39 per cent. The euro was otherwise up 70 pips to 1.2600. All eyes to the ECB tonight. As usual there is ample scope for disappointment.

Over in the US, equities did nought with the S&P up 0.3 per cent at the high and down 0.2 per cent at the low. As it is the index closed down 0.1 per cent (1403) with the Dow up 0.1 per cent (13047) and the Nasdaq down 0.2 per cent (3069). Nothing much really to say – of concern was an announcement from Fed Ex that they are lowering their earnings forecasts citing a global slowdown, but that was it really. Commodities too were then nixed as well, with copper up 1.5 per cent, crude up 0.7 per cent although gold was little changed at $1695 and the CRB index overall was off 0.2 per cent.

Rates were just as boring and yields pushed a little higher but magnitudes were small. So the 10-year yield rose a few bps to 1.595, the 5-year was a couple of bps higher at 0.63 per cent while the 2-year sits at 0.23 per cent. Aussie futures then did little of a tick or so and the 3s sit at 97.64 while the 10s are at 97.04.

That’s most of the nights events – just note that the Australian dollar is little changed at 1.0193 and the SPI was 13 points higher ( 0.3 per cent). So, before we get into the day’s events its worth a quick comment on those GDP figures yesterday. They were simply, outstanding. Save yourself some time and just dismiss any negative commentary on the numbers because they are either outright lies, or reflect a lack of expertise. It’s that simple.

It’s not that a 0.6 per cent increase is a surge in growth or anything, but numbers can’t be looked at in isolation. The lift in GDP follows a 1.4 per cent increase the month prior and would have been stronger if Australian companies had planned better. You see expenditure was strong and this wasn’t met by a lift in production but rather a run down in inventories (which detracted from growth) – to the tune of 0.3 percentage points. That is, if companies had been better able to predict demand, GDP would have been even stronger and probably closer 1 per cent.

Domestic demand – which is what governments, consumers and business spend – was closer to 1 per cent and is surging – 5.8 per cent annually. Consumer spending is a big chunk of that and what the RBA board need to understand, and clearly don’t, is that carbon assistance payments made only a very small contribution to that – negligible in fact.

I highlighted my concerns that the board would even mention it in their press release on Tuesday. The math just simply doesn’t add up if they could be bothered looking into it. Yesterday’s GDP really hammers home that point. Take out carbon assistance and there was no discernible difference in consumer spending for the quarter.

Otherwise, to say that growth in Q2 was half that in Q1 as some are (with the implication that it is therefore soft) is sloppy and I wouldn’t really bother with anyone trying to tell you that it won’t last and Q3 will be weak. It might be softer, sure, it might not. The important point is that the people making these claims now have been wrong on domestic growth for some time – years in most cases. So what value are their forecasts?

More broadly the numbers yesterday highlighted three glaring misconceptions that most economists and commentators in the Australian market have adhered to. Firstly that the fiscal policy is contractionary. Public demand was strong in the quarter. Secondly that the Australian dollar is overvalued and harming growth. Exports were very strong in the quarter and have been for a couple of years now (ex flood impacts). Thirdly, that consumers have put their wallets away. Move on people, time to get a new story book.

For Australia today we get an update on the employment figures. All we’ve seen in the news is how many people are losing their jobs, what we hear little of is how many people are being employed. So far this year we’ve had nearly 100,000 jobs created and the very strong growth we saw in domestic demand yesterday tells us more decent jobs growth is likely.

For today a lift of 5000 is expected and the unemployment rate is forecast to rise to 5.3 per cent. Other than these figures there isn’t a lot in our zone. Tonight look out for the breakdown of eurozone GDP, German factory orders and the big one, the ECB’s rate decision. A 25 bps cut is expected as of course are other announcements regarding debt levels for Spain and Italy.

The BoE meet and may or may not print again – it's random. Then for the US we get the non-manufacturing ISM and jobless claims.

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.

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