SCOREBOARD: Greek wait

Day two of the bailout sees markets relatively quiet, but a storm may be just around the corner.

Day two and the fallout from the Greek credit event has been limited thus far, although that could change at any moment. Markets have been jittery and irrational for a long time now and while that’s calmed down quite a lot so far in 2012, my spidey senses are tingling.

Already the pressure is on for Ireland and Portugal to organise similar deals and that’s not going to end anytime soon – more likely it will ramp up. Similarly, there’s the Greek election to contend with and we’ve even got some people droning on about how the Greeks will certainly need another bailout – in three years time.

I think the trick is to watch the tone of the news flow. For instance, in 2010 and 2011, half-point falls in PMIs were invariably described as collapses or what have you – the US was double dipping every second day (when obviously they weren’t) – ‘stall speed’ was the catch phrase. So I’m keeping a sharp eye on this tone – the verbs, adverbs and adjectives that are used to describe data/market moves – as a lead indicator for market sentiment more broadly and obviously price action.

Last year was a tough year to pick market moves, as detached as they were from fundamentals. So I’ll be adding Grammar Watch to see if that helps to pick sentiment – purely experimental, so we’ll see how it goes. It’ll be tough given my grammar is terrible. But I have noticed already that the drums are beating again, slowly, but they are beating and that has got me a tad worried.

China seems to be the flavour of this month and they are ‘slowing’ again and could have a ‘hard landing’ – again – for the fourth year running. That’s despite most of the data that we’ve seen so far being distorted by new-year – and erm, being strong anyways. Check it – exports are still growing at an incredibly strong, double digit pace, yet somehow that was weak. Imports were actually stronger than expected, surging almost 40 per cent – but there was no real mention of that. So I’m not actually worried about a significant slowdown, etc. But ‘Grammar Watch’ suggests that this something that we need to throw into the "Skyisfallingonourhead-ometer” patent pending.

Concerns over China are, of course, being cited as one reason why markets were fairly flat last night. Crude was down apparently because China is slowing (recall imports were up 40 per cent and crude imports were at a record high in February) and WTI fell almost 1 per cent ($106.4), while Brent was down 0.5 per cent ($125.4). Commodities elsewhere were weaker too – copper down 0.4 per cent, silver off 1.9 per cent and gold fell $5 to $1700.

In the equity space moves were generally small and so the Dax was 0.3 per cent higher, the CAC rose 0.07 per cent and the FTSE put on 0.09 per cent. Price action in the US was a little more mixed but not too different from zero. At close, the S&P500 lost 0.02 per cent to 1371, with utilities, telecoms and consumer goods outperforming, while basic materials, energy and financials weighed heavy. The Dow closed up 37.69 points (0.29 per cent) at 12,960, the Nasdaq fell 0.19 per cent (2984) while earlier the Aussie SPI was 0.3 per cent higher (4208).

Not much action for debt markets and US treasuries traded within a narrow range (10-year and 5-year within 2 to 3 basis points). At the time of writing, the 10-year yield was up almost a basis point (2.028), while the 5-year was just under 2 basis points higher to 0.906 per cent. the 2-year was also up just under a basis point to 0.322 per cent. Aussie futures did nothing, the 3s are at 96.45 and the 10s at 96.035

In other news and data, India’s industrial production was much stronger-than-expected at 6.8 per cent year-on-year with forecasts for 2.1 per cent, Italian GDP was confirmed at -0.7 per cent quarter-on-quarter for the fourth quarter and the US budget deficit came in at $232 billion in Feb versus expectations for $229 billion.

Looking at the day ahead, NAB’s business survey for February is out at 1130 AEDT. This isn’t formally forecast and realistically confidence should improve, in line with global trends. We’ll see what happens. I got a few questions yesterday asking why it matters for the policy outlook if confidence is weak because of perception rather than real fundamental issues. My apologies I should have fleshed that out then – was in a rush. The distinction arises because policy is much more potent if there are genuine fundamental issues to address. In the Australian context, there are not.

We are not heavily indebted as a nation, this is a misnomer. Nor do we have a glut of housing to work through like the US did. Naturally enough we know the unemployment rate is low – it will still be low if it rises to 6 per cent. Cutting rates to deal with distorted perceptions can be futile as we have seen. So the RBA’s rate cuts in November and December were actually met with falls in consumer confidence. The reason for this is because rate cuts cannot address the root cause of weak confidence if it is simply determined by misperception. It can’t by itself alter perception and indeed may simply encourage confirmation bias. That is, a rate cut in those circumstances may simply confirm a commonly held view that the economy is weak – ‘it must be, why else would they cut rates’. You know the drill. I suspect the RBA knows this, I’m not sure about some members of the board though. The last statement indicated that they do, given the bar for a cut appeared to be quite high – a material slowing in demand was required.

Other than that we get Aussie home loans at 1130 AEDT (market looks for a small fall) and tonight look out for the German Zew survey and US retail sales.

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

Follow @AdamCarrEcon on Twitter.