SCOREBOARD: Modest hopes

US stocks made some gains overnight, showing fears of slowing production remain overdone.

Leading indicators of manufacturing may have declined, with the Empire State manufacturing index being the latest one to show a sharp drop (the index fell to -5.85 in August from 7.39). Yet actual production is yet to show much weakness – stall speed weakness. So we found out overnight that industrial production put in a strong performance, rising 0.6 per cent month-on-month in July, which is three times the average, to be 4.4 per cent higher annually. Again, annual growth at 4.4 per cent is well above average (2.4 per cent). So far then we’ve learnt that US jobs are now rising at a faster pace they did prior to the GFC, US retail lending has picked up sharply and industrial production is strong and well above average – yep.

Over in Europe, stocks were lower with the Dax off 0.4 per cent, the CaC down 0.03 per cent and the FTSE off 0.5 per cent. Not much news here with everyone on holidays, although Spanish and Italian 10-year yields fell again – down about 6-8 bps apiece to 6.63 per cent and 5.68 per cent respectively. About the only crisis worthy news out concerned Greece. Greece as we know, wants more time to meet its reform program and the news last night is that it looks like they may get it. Germany’s foreign minister has backed calls for them to be given this time since the elections would have derailed things. Greek and German leaders meet in Berlin this Friday.

Overall I’m becoming a bit more confident then that the ‘slowdown’ we’ve seen this year is an exact repeat of the slowdowns we’ve seen over the last few years. It’s a three track CD, remember. It’s all about sentiment with the actual hard data remaining solid.

There are a few differences of course, the main one being that European growth has actually slowed. But elsewhere we are talking differences and magnitudes that don’t really change the overarching narrative – which is solid global economic recovery.

In any case, it was this data that helped pushed US stocks higher, although gains were modest. Shortly after the open the S&P 500 was up 0.3 per cent (0.4 per cent at the high) and the index really just bounced around there for most of the session. Volumes were light given the summer holidays and into the close we saw a modest sell off. So at the bell, the index was only 0.1 per cent higher (1405). The Dow then managed to close 0.1 per cent weaker (13164), while the Nasdaq rose 0.5 per cent (3030).

In the commodity space we saw some decent gains on crude, with WTI up almost 1 per cent after a report from the US energy department showing crude inventories fell.
Also providing support was commentary from the outgoing Israeli Defence Minister suggesting Israel was "ready as never before” for a war with Iran. The war would apparently last 30 days and 500 Israelis would be killed. Elsewhere we saw gold up a few bucks ($1605), while copper fell 0.3 per cent.

US rates saw some decent action with the 10-year treasury yield up another 7 bps or so to 1.815 per cent. The 5-year then rose about 5 bps to 0.802 per cent, while the 2-year was at 0.289 per cent. Australian futures were off 5 ticks on the 3s (97.16), while the 10s were down just over 7 ticks (96.65).

Finally for the price action, the Australian dollar was up about 30 pips to 1.0505, the euro was down almost 50 pips to 1.2289, sterling rose 10 pips to 1.5684, while Yen is still around 78.98.

Bits and pieces otherwise. For the US, CPI came in weaker than expected and was flat in July (0.2 per cent expected) to be 1.4 per cent higher annually. Core inflation remains above 2 per cent (2.1 per cent) and rose 0.1 per cent in the month following a 0.2 per cent gain previously.

Hippies, communists and others who crave the comfort of government intervention, will argue this gives the Fed scope to print a trillion zillion more dollars in an open-ended QE orgy. Yet that overlooks the fact that QE was only, at least initially, meant to stave off deflation, and with CPI above target it’s impossible to argue that deflation is a credible threat. The goal posts keep moving though.

More broadly, some have sensibly argued that the recent stronger data flow will see the Fed back away from QE3. The problem is that these people are being sensible. I’ve fallen into this trap before and am reluctant to do so again. Yeah, I know what you’re thinking. Strong growth – high inflation. They couldn’t possibly print could they? They have and they will. The Fed will simply move the goal posts again and crank up the PR machine. I won’t be convinced that QE is truly off the table until we see how intense the fiscal cliff theatrics are at year-end and that’s what I think investors need to look for.

Over in the UK there was a 200,000 lift in employment in the three months to June, while the unemployment rate fell to 8 per cent from 8.1 per cent. The Olympic preparation would have boosted the numbers, but the entire result can’t be attributed to the games. Meanwhile, the UK press reports a large number of UK economists want the government to deal with sky high public debt and enormous budgetary problems…wait for it, wait for it…by taking on more debt! Is that just pure genius or what. And the Queen wondered how it was that we had a GFC. Why no one saw it coming? In any case, the BoE minutes last night suggested the bank was open to more printing, so maybe that will save them.

Looking at the day ahead there is very little Australian data – average weekly earnings at 1130 AEST – and there is very little for the region. US data tonight includes the Philly Fed index, jobless claims, and housing starts. For Europe we see consumer prices, while the Brits release retail sales data.

That’s about it, have a great day….

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

@AdamCarrEcon on Twitter.

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