SCOREBOARD: Market omissions

Not that it had a material impact on the market, but US economic data was solid last night – maybe people were out celebrating Osama's death, who knows. But the ISM index in particular dipped only 1.2 points to 60.4 in March – well above average (51) and firmly indicative of a strong recovery. The prices paid component rose 0.5 points to 85.5 (its highest since June 2008) and the employment index was pretty much steady at 63 (the average is 49 and the record high is 64.7). In addition to that, construction work done rose by a stronger-than-expected 1.4 per cent in March, which should probably lead to some modest upward revisions to first quarter GDP.
 
Again, all the signs are that the global economy is travelling along quite nicely – that it's very strong in fact. Much of the data flow concerned manufacturing and trade sectors, but it was pretty much all solid. For instance, the Chinese manufacturing PMI was little changed for April at 52.9 from 53.4, ditto South Korea's at 51.7 (down a point). The trade data out of South Korea (April) and India (March) showed exports and imports for both economies surging – exports up 43 per cent year-on-year for India and 27 per cent year-on-year for South Korea – imports up around 20 per cent year-on-year for both.
 
We got nothing out of Wall Street stocks though, following a flat outcome in Europe. At the high the S&P500 was up 0.5 per cent, but those gains didn't last and the market soon went offered. At the close the index was down 0.2 per cent (1361) with energy, basic materials and tech stocks leading the index lower. On the upside were healthcare and consumer services. The Dow for its part was off 3 points (12807), the Nasdaq fell 0.3 per cent (2864) and the SPI was down 0.5 per cent (4793).
 
Action in the fixed income space wasn't much better. The major t-notes did nada – ranges were narrow 4-6bps, volumes were light and at the close the 2-year yield was off 1bp to 0.61 per cent, the 5-year fell 2bps to 1.97 per cent and the 10-year fell 2bps to 3.28 per cent. Aussie futures for their part were little changed at 94.86 (the 3s) and 94.56 (the 10s).
 
In the forex space, moves too were small although the Australian dollar did push through 1.10 again briefly before settling down to 1.0943 – little changed from yesterday afternoon. The euro was up 43 pips to 1.4830, the British pound fell 5 pips to 1.66647 while the yen was at 81.22 from 81.51. In the commodities space thins were generally weaker with gold down $11 to 1545, while crude fell 0.8 per cent on WTI ($112.9), Brent was off 1.1 per cent ($124.5) and copper fell 0.1 per cent.
 
Data elsewhere was light – the European PMI was revised up to 58 in April from 57.7. And for those who missed it, the RBA's commodity price index surged 3.8 per cent in April to be 21.7 per cent higher annually. Finally the Fed's senior loan officers survey shows that credit conditions eased in the first quarter and that loan demand picked up (except for residential mortgages).
 
The RBA's announcement (1430 AEST) is centre stage today and the market is pricing only a 2 per cent chance of a rate hike at this meeting. I think the probability of a hike is significantly higher than that – 49 per cent – but in the end don't expect one today (SCOREBOARD: Rates dither, May 2). Indeed, of about 22 economists surveyed only one is looking for a hike. As regular readers will know I think that is definitely the right call. But human nature being what it is, and economists being what they are, I just don't think the RBA is capable of changing their view so quickly, or of acknowledging the fact they, alongside many analysts and commentators, have misread the short-term dynamics again.  
 
The budget looms for sure, but that shouldn't be a reason for the bank to hold off at this point in the cycle – especially as it's unlikely we will be seeing major changes in the fiscal stance – certainly nothing that negates the need for several rate hikes over the next 12 months or so. I mean let's face facts – we are dealing with a weak and unpopular government. The odds of them doing anything of substance, anything that may offended anyone is very slim in my view. The talk is tough and there has been lots of political posturing, but that's probably going to be the extent of it.
 
Outside of the RBA we get kiwi wages at 0845 AEST, the non-manufacturing China PMI at 1100 AEST, the Reserve Bank of India meets (1530 AEST) and then tonight, watch out for US factory orders.

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