Scoreboard: European turnout

European stocks rose following strong manufacturing figures, but good data in the US failed to boost Wall Street amid mixed earnings reports.

A mixed session overall, with the Europeans taking some comfort in a manufacturing report suggesting a lift in that sector. The European PMIs rose to 50.1 in July from 48.8, which was stronger than the expected 49 and suggests that manufacturing expanded in the month. That helped the European bourses push higher, and we’re talking decent gains – the Dax rose 0.8 per cent, the CaC was 1 per cent higher and the FTSE100 rose 0.4 per cent.

Across the pond, Wall Street underperformed, although it’s not like data was bad in any way – quite the opposite. For instance, a third-tier manufacturing report (Markit’s US PMI) suggested that US manufacturing expanded in July. Similarly – and more importantly – new home sales surged 8.3 per cent in June following a 1.3 per cent increase the month prior. Despite this data, the S&P500 closed 0.4 per cent weaker (1685), the Dow was off 25 points (15,542) and the Nasdaq closed flat (3579).

Earnings reports were otherwise mixed, with Caterpillar disappointing but Apple beating estimates. That may have weighed, I guess – certainly weaker commodity prices did, with energy and basic materials the key underperformers for the session (falls of over 1 per cent).

The story here could be partly US dollar related, but weaker Chinese data certainly wouldn’t have helped either. The bigger influence for crude was a report from the Energy Information Administration, which showed crude output from the US at the highest since 1990. So crude (West Texas Intermediate) fell 1.8 per cent overnight with gold off $13.6 ($1321) and copper down 0.4 per cent.

US Treasuries too had a fairly decent move – the yield on the 10-year rose about 8 bps or so to 2.59 per cent following that lift in new home sales and slightly lower demand at a US 5-year Treasury auction. Otherwise there wasn’t much, so having spiked higher after yesterday’s CPI report, then selling off after a disappointing read on the Chinese manufacturing sector, the Aussie dollar was off about 70 pips from 1630 AEST to 0.9167, the euro was little changed at 1.3204 and the yen is at 100.3.

As for yesterday’s domestic inflation report, while the numbers weren’t that relevant for policy (recall that the Reserve Bank said at the last meeting it would cut even if inflation accelerated), there were some interesting aspects of the report.

Firstly, while most of the press is talking about how inflation pressures are easing, the truth is that underlying inflation pressures actually increased in the quarter, albeit modestly. They certainly didn’t ease. That this occurred with little contribution from the weaker Australian dollar suggests that in coming quarters underlying inflation will again increase further, perhaps quite a bit.

Normally this would be sufficient to see the Reserve Bank hold given that rates are already at record lows. Cutting in the face of rising inflation pressure, especially from a record low, isn’t the textbook response. But around the world central banks have dispensed the disciplines they previously operated under. Even in Australia the dollar is now the key target, and of course some businesses are still clamouring for more rate cuts.

That inflation, which is closer to the middle of the Reserve Bank’s target (the core rates trip out the carbon tax and they are closer to the mid point than 2 per cent) is being characterised as being at the bottom of the target, is just another indicator of the pressure being applied from many quarters for still-lower rates. And lower rates we’ll get. Whether it’s August or not is arbitrary – there are no sign posts for policy, so it really does boil down to how low the RBA wants the dollar and how fast it wants to try and get it there. None of which is public information.

To the day ahead, the SPI points to a flat outcome today, only up about 11 points or so. It’s pretty quiet otherwise, with the first major data out at 1800 AEST (the German IFO survey). Major US data includes durable goods orders, initial jobless claims, and the Kansas City Fed manufacturing survey. UK GDP is also out.

Hope you have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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