SCOREBOARD: Fiscal ditch

Wall Street ended in the red after US manufacturing slipped into contraction territory on the east coast super storm and fiscal cliff concerns.

Following an okay session in Europe (Dax up 0.4 per cent, CaC up 0.3 per cent and the FTSE100 up 0.1 per cent), US stocks fell into the red overnight after a weaker than expected ISM number.

The consensus had been for a reading of 51.4, but the index slipped to 49.5 in November (lowest since July 2009) on a combination of east coast storm activity and fiscal cliff concerns. The latter loomed especially large in respondent replies. Now by component, production actually rose a point to or to 53.7. So production accelerated in the month. Where we are seeing manufacturing weakness, or contraction, is in employment and new orders.

This highlights the fiscal cliff concerns – people aren’t ordering and are holding off on employment. For mine that means a rundown in inventories over the fourth quarter and a likely strong rebuild in the first quarter – depending on what games are played in Congress. For the overall economy, the ISM report shows a solid expansion (over 3 per cent) – recall that it is a reading below 43 or so that indicates contraction in the overall economy.

Anyway, US stocks didn’t like this data one bit, and the offer was on. As I write, (about an hour or so to go), the S&P500 is off 0.4 per cent (1411), while the Dow is down 39 points (12,987) and the Nasdaq 0.04 per cent (3008). Commodities seemed more immune to the data, probably receiving some support from other data yesterday showing China’s service sector growing at a brisk pace (the services PMI up to 55.6). So we saw modest gains in the metals space (gold up $7 to $1718 and copper up 0.1 per cent) while crude was up smalls (0.1 per cent to $89).

As mentioned, over in Europe, equities had better session of it, and part of that is because Greece looks set to buy back around €10 billion debt, which is around half what private creditors own (at 30-40 European cents on face value). Spanish and Italian bond yields also fell on that down 8 basis points to 5.24 per cent and 4.39 per cent respectively.

Elsewhere on the rates side there was little action – the 10-year yield traded within a 4 basis points range settling a little higher at 1.628 per cent. The 5-year is at 0.62 per cent, while the 2-year is at 0.24 per cent. Australian futures were then off 2 ticks on the 3s (97.41) and 4 ticks on the 10s (96.895).

Finally for the price action, and in the forex space, euro extended the bid we saw in our session yesterday to now sit at 1.3058, which is 20 pips higher than at 1630 AEDT but about 80 pips higher than yesterday morning. Not much otherwise; the Australian dollar was up smalls and sits at 1.0422, the British pound is up 60 pips to 1.6096, while the yen is at 82.22.

There's not really much to say otherwise. The business indicators data yesterday again suggested that third-quarter economic growth will be quite solid, notwithstanding the fall in mining profits and of course the monthly retail sales figures haven’t been a reliable leading indicator for many years – so the result yesterday doesn’t mean anything.

As to the day ahead, we have the Reserve Bank's decision at 1430 AEDT. Another cut is basically fully priced following the surge in business investment last week – yep, following the surge in business investment. Readers should go with that as the bank does tend to respond to fear and pressure. Economics has had little to do with this rate cut cycle – a surge in business investment! And even the Reserve Bank has acknowledged that growth has been above trend while it has cut.

The quite flimsy economic case to cut has been built on a steady flow of fraudulent arguments spanning many years, forecasting economic weakness. Instead, over the last three years, 85 per cent of demand growth has been non-mining related. It has actually been driven by consumption and the only way anyone could argue the non-mining economy was weak is if they haven’t bothered looking at the data. Or if they had relied on second or third-tier data like yesterday’s retail sales. For sure, those forecasts have been consistently wrong anyway, which is extraordinary. Still, I can’t stay angry at those goof balls for too long. I mean, financially the Reserve Bank needlessly slashing rates is great! Terrible public policy though, wasting away very valuable monetary policy ammunition like that, for an economy that isn’t even in a crisis! Isn’t even close.

There is a bit of data prior to that – the September quarter balance of payments, government demand numbers and building approvals (1130 AEDT). Otherwise the session is devoid of meaningful data and there is little tonight.

Have a great day…