SCOREBOARD: European joy

Day three and the rally continues, with European stocks rising between 0.6 per cent and 0.9 per cent on the major indices and US stocks looking like they'll match that – the S&P500 up 0.6 per cent (1106). There was little in the way of meaningful news and dataflow and what was there was mixed. On the negative side, new jobless claims rose 33k to 473k (438 forecast) with continuing claims steady at 4.56m. Then US producer prices showed input costs rising faster than expected up 1.4 per cent m/m (0.8 per cent forecast) in January and 4.6 per cent y/y. Finally, Wal-Mart reported its first quarterly fall in sales (down 0.5 per cent y/y).

Some positive data came out an hour or so later with the Philly Fed report showing a modest increase in February manufacturing activity ( 17.6 from 15.2). At that stage, equities were pretty much flat, but they bounced 0.4 per cent on the data and retraced soon after to then tread water. A bid tone developed a few hours later (5am our time) the vast bulk of the overall rise occurring from then.

Giving the market a boost were some solid gains in the commodity space – crude rose 2.2 per cent ($78.99), gold was up $14 to $1121 and base metals were up just over 1 per cent – some of the gains brought about from a modest drop in the dollar index. From late yesterday afternoon, the Australian dollar is up about 70 pips (0.9023), euro is 50 pips higher (1.3620), sterling fell 28 pips on deteriorating public sector accounts (1.5633), while the yen edged up to 91.32 from 90.98.

Most sectors on the S&P500 recorded reasonable gains, although basic materials, tech and industrials outperformed. In terms of the other indices, the Dow is currently up 77pts (10386), the Nasdaq 0.6 per cent (2240) and the SPI 0.89 per cent (4665).

On the rates side we saw US treasuries sell off and an announcement that $180bn worth of debt is going to be auctioned next week probably aiding the price action – especially after recent news of Chinese treasury sales. The auction announcement was probably a bit weaker than expected, but included $8bn in 30-yr TIPS, $44bn in 2-yrs, 42bn in 5-yrs and 32bn 7yrs. Overall the 2s/10s curve steepened as the yield on the 2yr rose 4bp to 0.87 per cent, the 5-yr rose 6bp to 2.44 per cent and the 10-yr rose 7bp to 3.8 per cent. Aussie futures traded on an 8-9tick range with 3s ending 4 ticks lower to 95.04 and 10s at 94.36.

In terms of other news and data, Canadian CPI came in stronger than expected with headlines rising 0.3 per cent m/m and 1.9 per cent y/y (from 1.3 per cent). Core rose 0.1 per cent m/m and 2.0 per cent y/y. This is right on the midpoint of the Bank's 1 to 3 per cent target, which apparently is fine, or so the argument goes, because there is plenty of excess capacity and inflation will moderate.
Unfortunately it occurs at a time that the major Canadian financial institutions are concerned about a housing bubble. With a cash rate at 0.25 per cent I think people who argue the excess capacity line miss the point completely. Obviously the cash rate at 0.25 per cent isn't fine if major institutions are concerned about a house price bubble. Moreover, inflation may moderate but that isn't even the point – even if CPI moderates a bit, it is still far too high to justify a 0.25 per cent cash rate going into a recovery and with an emerging house problems. That said there is little in the Bank's rhetoric to suggest a hike earlier than mid-year.

Outside of Canada, UK net borrowing was £4.3bn in January which was worse than expected, but the CBI manufacturing index came in at -36 from -39 in December and the highest since December 2008 - highlighting that the manufacturing sector continues to recover (albeit at a slow pace).

In Australia today we have the fun and joy of the RBA's statement to the House of Reps Economics committee. Sometimes it's even possible to get useful information out of it – sometimes. I suspect the linkage between government deficits and interest rates will get a great workout, but as for anything else it depends on the quality of the questions asked. In terms of the RBA Governor's initial statement, I think we already know the view.

Outside of Oz there is a run of Fed speak during the RBA's testimony, credit card spending in NZ (1pm) followed by PMI's in Europe and retail sales in the UK. As far as the US goes they release January CPI.

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