SCOREBOARD: Great hesitation

US retail data sent out a very bullish signal, but Wall Street was mixed as investors remained cautious.

Well those US sales numbers I mentioned the other day weren’t too shabby. Retail sales were 0.5 per cent higher in December, or 0.6 per cent higher less autos and gas, which was nearly double the expectation. This print also follows a fairly decent November outcome of 0.6 per cent as well (ex autos and gas). Complementing that data, business sales were up 1 per cent (November data), while inventories rose as well. Rising sales and inventories, especially with sales stronger than inventories, is a very bullish signal. What you don’t want to see are falling sales and rising inventories – that’s a sign that business is too optimistic and it’s usually followed by a cut in orders, production and the like. The situation we have in this data is usually a signal that economic activity will accelerate.

Looking at market pricing you wouldn’t really get a sense of how good the US data actually was last night – but markets go up, they go down, and most of the major indices were weaker around the globe, although we’re not talking major magnitudes. With about an hour to go the S&P500 is 0.1 per cent lower (1469), the Dow is off 9 points (13498) while the Nasdaq is 0.4 per cent lower (3103).

As to why? Most for the news flow suggests it was weaker German data that weighed on the market, or a weaker-than-expected Empire state manufacturing report. I’m not sure that this was necessarily new news though and of course the tier 1 US data was upbeat, which should have more than offset the modest all in the Empire state index (-7.8 from -7.3 and an expectation of 0). But, while we’re on the issue, German GDP contracted by 0.5 per cent in the fourth quarter, while for 2012 as a whole, GDP was up 0.7 per cent. The growth split didn’t actually look too bad – households are spending, government spending rose as did exports. Indeed exports, or net exports, contributed 1.1 per cent to growth. It’s investment that is dragging the chain, falling 0.9 per cent in 2012 – and that’s a confidence issue.

European news more broadly was light – the Spanish government, following the massive bond rally they’ve seen (25bps on the 10-year over the last 12 months) has ruled out applying for an ESM bailout – something which ratings agency Fitch agrees with. No surprise as both Spain and Italy are raising money with few troubles and at increasingly lower rates. Italy just last night sold 15-year bonds, first time in two years (yields of 4.7-4.8 per cent). The significance of this is that issues like this will lengthen what is already a reasonably long maturity profile – which of course makes Italy more resilient in the face of market panic. It’s very good news.

Once again there was very little in terms of other price action. Commodities were mixed – crude down 0.7 per cent to $93.4 (WTI), although gold was up $11 ($1680) and copper was flat basically. In the forex or rates space – ranges were narrow and as I write moves were small. The biggest move was on euro which fell 60 pips (1.3294) after those soft German GDP figures. The Australian dollar travelled on a 40 pip range and is little changed at 1.0556. Otherwise Sterling is at 1.6056 (down 20 pips), while the yen is at 88.78. In the debt space, The US 10-year sits at 1.83 per cent, the 5-year is at 0.74 per cent, while the 2-year is at 0.23 per cent – treasuries didn’t flinch after Fitch warned they may downgrade the US if they can’t sort out this whole debt ceiling thing.

There were a few other things worth noting. The Philly Fed President, Plosser, said that loose monetary policy would need to be reined in sooner than anticipated to prevent an acceleration of inflation. Bernanke showed no sign that he was listening to these wise words yesterday, however, and no one is expecting an end to QE anytime soon. On the data front, US producer prices fell 0.2 per cent in the month ( 0.1 per cent ex food and energy) to be 1.3 per cent higher annually (2 per cent ex food and energy).

Looking at the day ahead, we see Aussie consumer confidence at 1030 AEDT, followed by car sales at 1130 AEST. Poor confidence and record car sales are the order of the day. Tonight, look out for eurozone CPI, US CPI, US industrial production and the Beige Book.

Hope you have a great day…

Adam Carr is a leading market economist.

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