SCOREBOARD: House of discontent

Wall Street fell victim to fiscal cliff drama as House Democrats roused deadline fears, while Republicans countered a serious offer was yet to emerge.

Nancy Pelosi, the House Democrat leader, reckons that with holidays and other things around Christmas that Congress only has a few days up its sleeve to get a deal done on the cliff.

The problem is that John Boehner reckons that a deal isn’t even close. He was optimistic according to some – the most optimistic man in town – while at the same time arguing that the White House hadn’t put a serious deal on the table. Now he’s less optimistic and only talks about how a deal isn’t even close.

So as the drama lifts, risk appetite wanes and certainly it was risk off last night. Commodities in particular had the offer put on, partly due to a lift in the US dollar, but mainly just a turn in sentiment. There were substantial moves though and we saw crude down 0.8 per cent ($86), while gold fell $21 ($1696) and copper was 1.5 per cent lower. That move in crude and a 4 per cent fall in gasoline sales at the retail level saw energy and basic materials as a key underperformer on Wall Street overnight, although all sectors were weaker at the time of writing. In any case, with about an hour to go, the S&P500 is down 0.7 per cent (1418), the Dow has lost 81 points (13163), while the Nasdaq is down 0.9 per cent (2985).

Despite the price action, US economic data was actually quite good again. Headline retail sales rose 0.3 per cent in November, which was weaker than expected (0.5 per cent) but this was only because of falling petrol prices. Take out petrol and cars (volatile components) and sales rose 0.7 per cent, which is quite strong. Similarly, and over on the jobs front, new jobless claims fell again – by 29,000 (to 343,000) – in the week to December 8, although the four-week moving average is higher at 381 (due to the impact of the east coast storm mainly).

There wasn’t much action elsewhere really. The Australian dollar is 45 pips lower (1.0513) and euro is little changed at 1.3072. Then on the rates side, despite the turn in sentiment elsewhere, yields were again a little higher but not much – with the 10-year at 1.73 per cent from 1.71 per cent and the 5-year 2bps higher at 0.69 per cent, while the 2-year is at 0.25 per cent. Aussie futures were unchanged, with the 3s at 97.26 and the 10s at 96.775.

Bits and pieces otherwise. One of the more interesting snippets came from George Osborne, the UK Chancellor the Exchequer, who said he was open to scrapping the Bank of England’s inflation target in favour of a nominal growth target. You can see now why Mark Carney, the Bank of Canada’s head, was appointed to become the BoE’s new governor. He’s all for nominal GDP targeting – and Osborne praised him for leading the global debate.

Now to be clear, the BoE has already dropped its inflation target – this is implied by its actions. So this would be a formal switch to something that is probably being done surreptitiously anyway. For mine, nominal GDP targeting is something that no self-respecting economist would ever support. But then it seems there aren’t too many of those around these days. Plenty of guffawing yes men and propagandists though.

Ask yourself a question – why wasn’t this being seriously advocated some years ago if it’s so good? Why wasn’t it adopted instead of inflation targeting? There are reasons for that – it is an inferior way to conduct monetary policy. The reason it has so suddenly reappeared – it’s an old theory – is because inflation is above target in the UK, Europe and getting close to that in the US. Changing the goal posts, the idea goes, will allows central banks to continue printing money and governments to monetise debt, in the face of high inflation, without being criticised for missing their target. It’s all PR.

All the while, central banks and governments can say they are working hard to achieve their target, when in fact they are debasing their currencies and monetising deficits. There is much less discipline and more political discretion with this approach. The BoE is doing this anyway. I would imagine Wayne Swan will get his minions and propagandists onto the task here as well in the new year.

Other than that, US producer prices fell 0.1 per cent in November after a 0.2 per cent fall the month prior. Then US business inventories rose 0.4 per cent, while sales fell by the same amount. That followed a strong 1.2 per cent gain the month prior though and of course we’ve got the influence of storm activity.

The SPI suggests we’ll see a small fall for Aussie equities today (-0.3 per cent), while the calendar shows there’s nothing for Australia. For Japan watchers we see the Tankan at 1050 AEDT. Around lunchtime there is a ‘flash estimate' of the Chinese manufacturing PMI. Tonight, the key data includes eEurozone inflation and employment data, while the US also has inflation data out, followed by industrial production.

Hope you have a great weekend…

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