In an action that has probably locked out any chance of a significant near-term QE tapering, US bond yields surged overnight, the 10-year up 17 bps to 2.17 per cent, which is the highest rate since April 2012. Solid growth momentum, rising inflation, the fact that the Fed is monetising its deficits – there is no shortage of reasons to see bond yields spike. I wouldn’t touch a fund invested in them.
But the catalyst overnight appears to be further evidence of a strong rebound in US house prices. The S&P/Case-Shiller house price index rose a further 1.1 per cent in March to be more than 10 per cent higher annually – the strongest gain in seven years. That it was accompanied by a decent lift in consumer confidence (for May) to 76.2 from 69 and well above the consensus forecasts of 71 is helpful, and confidence is now at its highest since 2008. But the single most important factor is the ongoing strong gains in US house prices. I mentioned this last month – there is no shortage of US cities recording double digit annual prices gains, up near 20 per cent!
Equities themselves had a good session on this data. Coming back from the Memorial Day Holiday, the S&P500 closed 0.6 per cent higher (1660), the Dow was up 106 points to 15,409, while the Nasdaq rose 0.9 per cent (3488). Gains were led by health, energy and basic materials, the latter two boosted by a 0.6 per cent gain in copper overnight and a 1 per cent lift in crude ($95.1) – good gains considering the lift in the US dollar. The euro was down about 70 pips or so to 1.2856, USD-JPY was higher at 102.35 from 101.92 and the Australian dollar was modestly weaker at 0.9615.
Despite decent gains abroad, the SPI fell a further 0.2 per cent overnight, the weak currency perhaps weighing. Fact is a weak economy, weak currency and underperforming stocks all go hand in hand. The effort to lower the Australian dollar has reduced the attractiveness of our stocks and made people concerned about the health of the economy more broadly (even though there is nothing to be concerned about). Sentiment has soured, which is why the Aussie market languishes in the same trading range it has held for the last three years – 25 per cent or so below its record – while US and European stocks push new records, even with their recessions and sluggish growth etc.
While our equity futures may not have followed global markets, debt futures did and our 3s and 10s had a decent sell off – 7 to 9 ticks respectively, to 97.32 and 96.58.
Anyway, European equities outperformed and last night the Dax was up a further 1.2 per cent after a strong session the previous night. The CaC in turn was 1.4 per cent higher, and the FTSE 1.6 per cent! Helping are signals from the European Union that they will allow more time for ailing economies to reach their budget targets, and there is a general sense anyway that Europe is on the mend. Not really much apart from that through.
So then turning to today's events, data includes Australian housing affordability (1000 AEST) and construction work done (1130 AEST), while tonight we see German labour and price data and the OECD’s May economic outlook. It’s pretty quiet for the US, just a speech from the Fed’s Eric Rosengren and mortgage applications.
Have a great day…
Adam Carr is a leading market economist.
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