SCOREBOARD: Market doldrums

Markets in the US and Europe were stuck in a rut overnight, despite a raft of encouraging data.

There was nothing doing for last night, it seems. Markets are in a rut and even the run of better-than-expected data doesn’t seem to be able to shift it, nor the ill-timed central bank action last week.

Stocks in Europe were all weaker overnight. The Dax fell 0.5 per cent, the CaC was off 0.7 per cent and the FTSE was down 1 per cent. And that’s despite eurozone industrial production blitzing expectations of zero per cent to rise 0.6 per cent. Production is still soft, sure, and it’s off 2.8 per cent year-on-year but May’s number points to the recession being on the lighter side.

The fact is, prices aren’t really pointing to a massive slowdown and French inflation was stronger than forecast, rising by 0.1 per cent to be 2.3 per cent higher annually. This was above target and stronger than the 2.2 per cent expectation. We’ve yet to see any of the meaningful disinflation that is usually associated with downturns. But we’ll see. For the most part where we have seen moderate inflation, it’s fallen because of oil and other commodities. But inflation is still elevated. Ahh deflation, whatever happened to that?

Maybe punters were spooked because of the rise in Spanish and Italian bond yields overnight. At the high, Spanish 10-year yields had put on about 13 bps to be back up to 6.64 per cent. They subsequently eased to 6.56 per cent but it is a reminder of the broad, self-fulfilling problem. Italian yields were up about 10 bps on the 10-year to 5.9 per cent, but I’m not really sure why (cartels probably). They’ve got a bond auction tonight of 3-year bonds, which is worth watching. The thing is, they sold a hefty €7.5 billion of 12-month bills last night and yields dropped sharply. The auction was a huge success. Last month they would have paid 3.97 per cent for such an auction. This time around it was about 2.69 per cent. Otherwise, there wasn’t really much in the way of news flow that I could see.

Over on Wall Street, stocks followed the European lead, selling off on the open and hitting a trough soon after (-1.2 per cent). That occurred despite a much improved jobless claims report. New claims fell 26,000 to 350,000 in the week to July 7, which is the lowest level in four years. You could argue, and some will, that the improvement is due to seasonal factors given there were fewer auto layoffs, but the fact is jobless claims have been trending down. That would seem to firm up my view that the current global slowdown (or concerns over it) will play out exactly as it did in 2009, 2010 and 2011. Let’s face it folks, markets have been given a three track CD and it’s stuck on repeat.

In any case, a bid developed from the low and the S&P managed to retrace some of those loses to close 0.5 per cent lower (1334). The Dow was off 0.3 per cent (12573), the Nasdaq fell 0.8 per cent (2866), and the SPI was flat (4038). It's fair to say that concerns over the earnings season are a problem, and pre-season the ones who have already reported seem to have disappointed.

In terms of forex and commodities, the euro was down about 40 pips to 1.2199 and the Australian dollar was off about the same to 1.0139. Commodities too were generally weaker. Gold was down a bit over $3 to $1572, copper fell 0.7 per cent and crude was flat at $85.8.

Similarly, there was nothing too exciting for rates. US Treasuries were mixed and pushed higher on the 10-year, with yields down a couple of bps to 1.47 per cent. The 5-year yield rose smalls to 0.628 per cent while the 2-year was at 0.26 per cent. Australian 3s then rose two ticks to 97.86 and the 10s did nada at 97.22.

Now before I get into the day ahead it's worth making a few comments on yesterday’s employment numbers. It was a bad omen certainly, in the lead up to the carbon tax impost, but for the Reserve Bank's decision the result should be meaningless. After all, the fall in employment was only one month of data and the unemployment rate is still very low. So far, there is no serious reason to question the strength of the Australian economy just yet. So to argue that the numbers support an economic case to cut rates is simply ridiculous.

Then there is the political case. We know the board cut on a whim and I think one of the greatest fears of the government is that the carbon tax should weaken growth. So the board could panic again and cut because of their political leanings – recall former board member Professor Warwick Mckibbin’s comment on the matter here.

More generally, the impact of the carbon tax is something we need to watch closely. If the economy weakens from here it will be hard not to conclude that the carbon tax has played an important role in that. I had a twitter chat with someone yesterday who pointed out that surely there are other bigger issues at play globally that would weigh. Certainly they are weighing, but consider this. They’ve been going on for a long time and yet the Australian economy has proven resilient throughout. Growth in the March quarter of this year was phenomenal despite global woes.

It defies belief that if we weaken sharply from here that this would all be due to global concerns, when the major new influence is the carbon tax. This isn’t my prediction. I’m still optimistic on growth but this is the great uncertainty and we need a mature discussion about it, not propaganda. I’ll be upfront about it, I don’t know what the effect will be – hopefully minimal, but theory suggests the impact could be greater than that. Stay tuned.

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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