SCOREBOARD: Mixed signals

For much for the European session it was ‘risk on'. Crude, copper – in fact, most commodities – had a bid, and indeed European stocks pretty much all finished higher (Dax and FTSE up 0.2 per cent while the CaC closed 1.01 per cent higher) boosted by news that 25 EU countries agreed to a new fiscal pact (to be signed in March). Across the Atlantic, things then looked hunky-dory initially and at the open, the S&P was up about 0.6 per cent.

Cue some disappointing US economic data, however, and the reversal was on. The data wasn't first tier or anything, but in the absence of anything else and with Greek talks fluctuating (allegedly) between sealing the deal and collapsing – on a daily basis – it was enough. The S&P was down 0.5 per cent at the low, recovering some of that to be off 0.2 per cent as I write (1310). Financials, telecoms and tech stocks appear to be the key out-performers at this stage, with energy and industrials lagging, although crude is mixed as I write. WTI is down 0.5 per cent ($98.2) and Brent up smalls ($110.8). The Dow is otherwise off 27 points currently (12626), the Nasdaq is up 0.1 per cent (2814) while our very own SPI is 0.1 per cent higher at 4231.

As to that US data – consumer confidence fell to 61.1 in January from 64.8 (average 91.6) and the Chicago purchasing manager's index slipped to 62.2 from 60.2. Certainly nothing major, and yet US 10-years continued to push higher through the session, with yields off another 5bps on the 10-year (1.804 per cent) while the 5-year yield fell just over 3bps to 0.711 per cent. The 2-year yield was up smalls to 0.214 per cent. Aussie futures followed suit, 3s up 4 ticks (96.890) and 10s up 5 ticks (96.270).

Finally to the price action and for the forex market, Australian dollar initially followed the risk bid, hitting a high of 1.0685. As mentioned though, the offer was soon on and the currency dropped almost a big figure from the high. At the moment, Australian dollar is at 1.0616 (down 20 pips from 1630). We saw a similar pattern for euro, although the offer was harder and from the high, euro is down 166 pips, currently at 1.0383 (down 110 pips from 1630). Sterling is then up smalls (1.5762), while yen is little changed at 76.19.

Bits and pieces otherwise. In Europe, labour market data shows that German unemployment fell to 6.7 per cent from 6.8 per cent, although Europe-wide, the unemployment rate rose to 10.4 per cent from 10.3 per cent in December (euro-era high). UK mortgage approvals then rose 52,900 in December, which is the highest for the year, although consumer credit fell 0.4bn in the month, which is the biggest fall on record.

Looking at the day ahead, Aussie data is pretty much confined to the ABS house price index for the fourth quarter (at 1130 AEDT). There is nothing for NZ and the only other major data release for the region is the Chinese manufacturing PMI (for January and at 1200 AEDT). Indian trade data is out this afternoon (1630 AEDT) and then tonight, keep an out for the ISM index (January) and the ADP employment report. The ECB's Weidman speaks as does the Fed's Plosser.

Before I sign off I want to clarify some of the points I was making on household debt in Monday's note – I got quite a few emails asking about some of the numbers. So here goes.

The ABS data I referred to shows that total household liabilities (including credit cards, car loans, mortgages, investment properties etc) for middle wealth households (middle 20 per cent) at $128,000 (on average).

These households had $555k on average in assets, of which $77k were cash, shares and super (ie. liquid assets and yes I'm including super in that, because you know that if you really had to, you could get it). By my workings, this gives debt outstanding, less liquid assets, of $51k and a debt to disposable income ratio of 130 per cent by that measure for the middle 20 per cent. The top net worth quintile has a positive debt less liquid assets position – ie. no debt. This is the same as people in the fourth net worth quintile – no debt after excluding liquid assets which is the same for the national average and even the lowest net worth quintile – who have debts averaging $24k against liquid assets of $25k and income of $30k. So to be clear, Australians, on average, have no debt once you take into account cash deposits, shares and super.

It's only when you get to the second quintile (second lowest by net worth) that debt seems to become a ‘problem', with a debt less liquid assets position of about 280 per cent – remember that's 20 per cent of households at face value. However, ABS data shows that only 47 per cent of this lower quintile have a mortgage (although that's the second highest proportion of households). So all of a sudden, you are only talking about 9 per cent of households that are eligible for this higher debt to income position – 25 per cent of mortgage holders.

My bet is that most of this 46 per cent of lower net worth individuals sit quite comfortably within the higher net income quintiles - ie. they may not have a lot in the way of assets, but they are higher income earners. I don't have data for this however, but you can infer it. For a start, the median income is higher in this group than the third wealth quintile and also for all households, and we know that higher income households hold most of the mortgages. At worst, we are talking about 4 per cent of households then with lower or average incomes and higher debt (about 10 or 11 per cent of mortgage holders) by my reckoning. That's not to say they are in distress, it's just that debt relative to income and liquid assets is higher. Given our very low default rates, this group are still having no trouble servicing their mortgages it seems.

So in sum then, Australia's debt position is not onerous for the vast majority. Most Australians don't even have any debt to talk of when you net out liquid assets. Even most mortgage holders appear to be in a great position – able to offset modest outstanding debt levels with highly liquid assets like cash and shares. This leaves only a small proportion with few liquid assets and a comparatively large amount of debt. That said, most of these people in turn appear to be younger (a good 10-13 years younger than other wealth groups according to the ABS). They also appear to be higher income earners and so at the reasonably early stages of their wealth accumulation phase. Debt servicing does not seem to be a problem.

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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