SCOREBOARD: Market vigilance

That the ISM index wasn't as weak as feared, at 50.6 in August from 50.9 in July, doesn't appear to have had a discernible impact on sentiment overnight. Nor did the 12,000 drop in jobless claims to 409,000 in the week to August 27, or the solid gain in chain store sales – up 4.6 per cent in the year to August.

Instead, equities on Wall Street were offered and the S&P 500 closed 1.2 per cent lower (1,204) with financials, industrials and basic materials leading the index down (although all sectors were weaker). The Dow was off 119 points to 11,493, the Nasdaq fell 1.3 per cent (2,546) and Australia's SPI was down 1.1 per cent (4,258). It could be the case that punters are awaiting payrolls tonight and of course this is going into a long weekend for the US (Labour Day on Monday). So I can see why people are perhaps squaring up.

Then again, perhaps the failure of the ISM index to enthuse stems from the fact that it has actually slowed sharply. It was only three months ago that the index was at 7-year highs. Now, at 50.6, it is just below average (51.3). Similarly, global PMIs have also slowed – the EC PMI for August revised down to 49 from 49.7 and the UK PMI fell to 49 from 49.1. It's a similar story in Asia, with China's PMI at 50.9 in August, up slightly from July's 50.7, but still down over the last few months. At face value, there is a case to be made that global manufacturing has slowed. The issue, and why I'm not quite convinced of this slowing, as I have pointed out in the past, is that the tier one data (industrial production, etc), or the hard data, has actually accelerated throughout this deterioration (in the PMIs), and where it hasn't accelerated, it at least remains robust.

China's industrial production, for instance, has shown reasonably constant and strong growth of about 14 per cent year-on-year – a rate broadly unchanged (and in fact a little bit faster) from what we saw in the second half of 2010, yet the PMI has deteriorated and people have panicked over that. In the US, industrial production accelerated in July and as we found out the other night, factory orders surged. I've also been highlighting to readers that global trade remains strong and yesterday we found out that exports from India rose 81.8 per cent over the year to July, while imports were up 51.5 per cent.

At the very least, this combination of factors shows that fears of a renewed recession have been wildly exaggerated (largely by the media and the regular doomsayers they roll out during these times). This is especially the case for Australia. Recall those commentators and business 'leaders' who had been suggesting that the non-mining economy was in a recession and that retailing had ground to a halt.

The reasonably decent earnings season shows, as does yesterday's data, that this was a complete falsehood. Their calls have been proven wrong and shown to be utterly baseless. What we have seen in contrast is that earnings have been solid. Firms, even in the non-mining space, have been investing and have made solid investment plans for 2011-12. This in no way fits the description of a recession and shows, in contrast, that firms are upbeat about the future (refer to my capex note yesterday). Individual companies are being hit for sure, but this doesn't appear to reflect broader macro trends, but rather failures of management and strategy (as seen by the success of similar firms within the same industry). Perhaps it's why some of these people have been so vocal in talking about a recession. But in any healthy economy, you've always got your winners and of course, your losers. That doesn't mean the world is ending or the sky is falling on our heads. It's how a free market system works.

Anyway, I digress. Market moves elsewhere followed the risk-off pattern, with yields on US treasuries falling – 2-year down over 1bp to 0.18 per cent, 5-year down almost 6bps to 0.9 per cent and the 10-year off 9bps to 2.13 per cent. Volumes were about 18 per cent below average (through Brokertec) and ranges were wide – 15bps on the 10-year and 10bps on the 5-year. Australian futures were up 4/5 ticks on the 3s and the 10s to 96.18 and 95.61, respectively.

In the forex and commodity space, we saw the Australian dollar up 40 pips or so to 1.0735, the euro fall to 1.4269, while sterling was down 50 pips to 1.6186. The yen was little changed at 76.88. Gold was then flat at $1,826, silver was down smalls and copper was off 1.5 per cent. Finally, crude was down 0.7 per cent on Brent ($114.06), while WTI was basically flat at $88.73.

That's about the lot in terms of data and price action. On the news front, the argument between Europe and the IMF continues. Recall that the IMF reckons that European banks need about $200 billion in extra capital, a figure denounced by European officials as it relies on using credit default swaps to mark to market. I have some sympathy with European concerns here. Moreover, the Europeans point out that in 2009 the IMF estimated losses from the financial crisis at $874 billion, which was later revised down by a quarter (or almost $220 billion). Whatever the case, it was an act of stupidity for the IMF, in this environment, to spark such a public debate. It's almost as if they don't want sentiment to improve (insert maniacal laughter).

Nothing out today thankfully and tonight it's all about US payrolls. The market looks for a 65,000 rise, with the unemployment rate expected to remain steady at 9.1 per cent.

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

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