SCOREBOARD: German spirit

It's remarkable that German businesses are more optimistic than their Australian counterparts. Truly stunning actually, but they are.

The well respected German IFO survey showed the business climate index rose to 102.4 in December from 101.4, which is actually above the average of 100. The current assessment index fell a bit to 107.1 from 108.1 (the average is 102), while the expectations index rose to 98 from 95 (the average is 100). This is great news obviously and supports my view that the worst is behind us in Europe. Indeed following S&P's upgrade of Greece's debt rating, the European Central Bank announced last night it will now accept Greek bonds as collateral.

All good and Greek bond yields fell sharply, with Italian and Spanish yields following suit. The 10-year Italian is now at 4.33 per cent with the Spanish equivalent at 5.24 per cent – both down about 6 bps or so. European stocks then got a boost as well, although it was modest in the end as fiscal cliff concerns weighed. As it was the Dax closed 0.2 per cent higher, the CaC was up 0.4 per cent and the FTSE rose 0.4 per cent.

So, on to those cliff concerns. He said she said; risk on, risk off! I'll, be brief because it's boring. Recall we had heard there had been some compromise on the last true sticking point – taxes on the wealthy. Barack Obama wanted a 250,000 cut, Boehner was looking for $400,000 – down from $1 million. The glory of US politics was on display last night as Boehner reckoned the House will now vote on ‘Plan B'. That is – a $1 million cut off, which Obama has already rejected. Pure genius. More reasonable GOP members have urged Boehner not to waste everyone's time as the bill is already dead. Senate won't pass it and even if they did, Obama would veto it.

The S&P500 is off 0.5 per cent, at 1438, with not long to go, the Dow is 64 points lower at 13286, while the Nasdaq is 0.1 per cent lower at 3050.

Commodities were pretty much all weaker as well – gold was off smalls at $1669, while copper fell 1.3 per cent, although crude prices shot up 1.7 per cent at the time of writing to $89.50 as a report from the Energy department showed inventories falling for some fuel products as demand increased.

Not much action in the forex space I'm afraid – the Australian dollar fell below 1.05 and currently sits at 1.0491 or about 30 pips lower than at 1630 AEDT. The euro is unchanged at 1.3250, ditto sterling, which sits at 1.6262 and Yen at 84.42. It wasn't much better as far as US treasuries were concerned. The 10-year yield traded within a 6 bp range at is currently unchanged from 1630 AEDT at 1.79 per cent. The 5-year sits at 0.77 per cent, while the 2-year is at 0.27 per cent. Aussie futures did little – up 2-3 ticks or so with the 3s at 97.24 and the 10s at 96.665.

Bits and pieces otherwise. On the data front US housing starts fell 3 per cent in November after a 5.3 per cent gain the month prior. Then over in the UK, the Bank of England's minutes show there was an 8-1 split on the issue of quantitative easing. There were no hints in these minutes that more QE is coming, but that's the general sense of things following the government's recent support of nominal GDP targeting. Fact is, and as the inflation numbers showed us the other night, UK inflation is still well above target at running 2.7 per cent.

Obviously this is a grave concern in and of itself, yet inflation is above target while the economy is bouncing around recession. As the economy recovers it is reasonable to assume that inflation will continue to push higher.

Just quickly on the issue of Australian business confidence I mentioned earlier, I am actually encouraged by this moment of clarity that we seem to be enjoying. There is an article in the AFR today referring to some Australian manufacturers who acknowledge that there is little we can do about the strong dollar and that indeed other countries have learned to thrive with a strong currency.

As regular readers will know this is something I have argued we should have done from the start. Articles like this are critical because the great national whinge on macro-economic policy settings – interest rates – has been destroying confidence in this country and has been completely counterproductive. Now that we have this realisation (albeit it's been excruciatingly gradual) that cutting rates isn't a cure all and can't weaken the dollar or boost confidence, the national debate might be able to refocus on to more productive issues.

Because I agree, we do need to become more competitive. Scrapping the carbon tax is obviously a great start – the idea that a low polluting country like Australia should handicap its own industry with this tax is just beyond stupid. And we are a low polluting country – per capita comparisons are deceitful and deliberating misleading.

So for today, the SPI suggest the Australian market will be flattish at 0.1 per cent. Then the calendar today is light, with very little out – the RBA bulletin – while tonight all we see are German producer prices, another US GDP estimate (expected to be unchanged and above trend at 2.7 per cent) jobless claims and then finally, UK retail sales.

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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