The good news is that the strong gains we saw following the EU’s triumph – yes triumph – have been held. Indeed, in Europe, strong gains were extended by another decent margin and the Dax rose 1.2 per cent, the CaC rose 1.4 per cent and the FTSE was 1.3 per cent higher. US markets initially looked like they were going to follow suit and just after the open, the S&P was up 0.3 per cent.
That was the high though because soon after the ISM index came out, severely disappointing markets. The index slipped to 49.7 (its lowest since July 2009) from 53.5 (versus an average 51) on the back of sharp falls in prices paid and new orders. The double-dip call has naturally gone out again and given that it follows declines in Chinese and European PMIs, fears over the global outlook more broadly have intensified.
At this point it’s worth remembering that the PMIs, especially for Europe, are not really very useful for analysis. They get too much press and are inconsistent with other more reliable indicators – like the German IFO survey, in the case of Europe. The ISM is different though it is a great indicator and one I hold a lot of respect for. It is prudent then to at least raise an eyebrow at this fall. But at this stage I wouldn’t do much more than that and I would certainly dismiss all the alarmism over another double dip – it really has become quite boring.
As I have highlighted before and for the benefit of new readers, we need to be very careful about grinding and gnashing our teeth about another, yet another, boring double-dip call. Every year it happens – at least once. Every year we got through the same thing. And it always comes to nothing. Manufacturing data softens for a few months, payrolls growth slows etc. This is normal data volatility. The usual doomsayers come out and start screeching about a double dip – "it’s really happening this time, no seriously”. Or the much more insidious and cowardly "the probability of recession has risen to approximately 65 per cent”. Just like every single other time, right? This kind of thought has been wrong time and time again, and the rational investor should dismiss it and those advocating it – track record matters.
That’s not to say we shouldn’t be alert. The ISM is a good indicator. But it is subject to volatility, like other data. Recall all the way back in July 2011 when some economists and commentators expressed excessive alarm over a dip in the ISM to 51.4 from 55.8. We know the US economy didn’t double dip, jobs growth picked up and so did the ISM, heading back up towards 55. That is the most likely outcome this time as well. Only if this dip is sustained would a slowdown be a reasonable call.
With all the press over global manufacturing and double dips, the S&P500 still only hit a low of 1355 (-0.5 per cent). Indeed, a bid subsequently developed from that point and accelerated into the close, so at the bell the S&P500 was 0.3 per cent higher (1365), although the Dow fell 0.01 per cent (12871), while the Nasdaq was 0.6 per cent (2951) higher. The SPI looks like it put on another 0.5 per cent (4116) overnight, so not a bad session – and that’s despite broad-based weakness across the commodity space. Crude gave back some of the 9.4 per cent gain on Friday, falling 1.5 per cent ($83.65) and gold fell almost $7 to $1597, while copper was off 0.8 per cent.
On the rates side we saw US Treasuries rally and the yield on the 10-year dropped 4bps to 1.59 per cent, the 5-year fell about the same to 0.67 per cent and the 2-year was at 0.29 per cent. Aussie futures were then up 4-5 ticks, with the 3s at at 97.57 and the 10s at 96.965.
Finally for the price action, the Australian dollar is up about 35 pips to 1.0248, the euro is off 60 pips or so to 1.2579 while sterling and yen sit at 1.5688 and 79.50 respectively.
In terms of other data out last night, we saw the Italian unemployment rate slip to 10.1 per cent from 10.2 per cent, while eurozone unemployment otherwise rose to 11.1 per cent from 11 per cent. In the UK, the manufacturing PMI spiked to 48.6 from 45.9 and then US construction spending rose a solid 0.9 per cent in June after a 0.6 per cent increase in May.
The calendar today includes the RBA board meeting at 1430 AEST. The decision to not cut should be an easy one but the board, as I mentioned yesterday, is looking at its own made-up metrics, so who knows. Former RBA board member Warwick McKibbin reckons the bank should hike rates today to reverse last meeting’s cut. For consistency they certainly should. It’s not going to happen though obviously, but there you go – that’s the board just there – erratic and inconsistent.
Specifically, McKibbin said: "Last meeting they shouldn’t have cut rates…if you’re always adjusting to what you think is going to happen, you’ve got the problem that if it doesn’t happen, you’re in the wrong place.” Hear, hear! Well said for sure. The RBA board is certainly in the wrong place and look foolish following stronger data, and now an accord of sorts from Europe. That the world is now obsessed with another US recession is irrelevant. Every other double dip hasn’t occurred – hasn't even been close.
Other than the RBA’s meeting we see building approvals at 1130 AEST. Tonight we see eurozone producer prices and US factory orders.
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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