SCOREBOARD: Money tree

In the shadow of the EU summit, it's the view that the world's major central banks will print more money that had markets buoyed.

Another solid session for global equities overnight and risk in general. Obviously the success of the EU summit is providing the foundations for this turnaround in sentiment but a few other factors appear to have emerged as well. It seems that most punters reckon the world’s major central banks will print more money following the recent dip in manufacturing indicators. Certainly we know the BoE is already predisposed, the ECB will at least discuss another cut and the Fed don’t even need an excuse – they’re pre-programmed. We’ll find out soon enough and it’s just as likely as not.

The thing is it’s far too early to write off manufacturing just yet and data out overnight shows why. US factory orders are rising and in May, increased by a stronger-than-expected 0.7 per cent (market looking for 0.1 per cent). And then there’s car sales. Americans do love their cars – Australians too apparently – and doesn’t it show in the data. Toyota reported that US car sales are up 60 per cent for the year – Honda’s were up 40 per cent. Then you had GM report an increase of 16 per cent. These are phenomenal numbers and no it’s not discounting. Average selling prices were up about 3 per cent. It makes sense right. The housing market is rubbish but Americans are very wealthy and indeed credit growth has surged recently. The car industry is the beneficiary of that by the looks and what with the world apparently swimming in oil now, there’s never been a better time to buy.

Having said that, crude prices surged again last night, up 4.6 per cent in New York trading to sit at $87.6. There were two reasons for that, one being Iran. Apparently an Iranian general, short on brains but long on crude, said that Iran wouldn’t ‘sit idly’ by as the US and Europe built a missile defence shield. So they did the only sensible thing they could and conducted missile tests. It’s not just Iran though. If the world’s major central banks are going to print money again, that’s risk on. That’s also why gold shot up almost $20 to $1617, while copper was up almost 2 per cent.

Back to equities, the major European indices set the standard with the Dax rising 1.3 per cent and the CaC 1 per cent, while the FTSE was 0.8 per cent higher. In the US, stocks pushed higher from the open but didn’t quite manage the gains seen in Europe. The S&P for instance finished 0.6 per cent (1374) higher (with energy stocks a key outperformer) and the Dow was up 0.6 per cent (12943), while the Nasdaq outperformed, rising 0.8 per cent. Even the Aussie SPI had a decent session, rising 0.7 per cent (4125).

Price action elsewhere wasn’t that exciting. The Australian dollar for instance is 30 pips or so to 1.0283, euro is unchanged at 1.2608 (50 pips range), while sterling and yen are at 1.5690 and 79.8 respectively. Similarly over on the debt side, US Treasuries managed to sell off a bit – the 10-year yield rose about 5bps to 1.63 per cent, the 5-year was up 3bps to 0.7 per cent while the 2-year sits at 0.3 per cent. Aussie futures were little changed, down a tick or so to 97.51 on the 3s and 96.925 on the 10s.

Bits and pieces otherwise. As to yesterday’s Aussie data and the RBA meeting, I don’t think there is really a lot to say. Certainly there was nothing in the RBA’s press release that signalled another cut is imminent. Having said that when you look at the factors which drove the RBA to cut in the first place – industry pressure, poor news flow – none of that has really changed. Industry is still calling for lower rates and the news flow can and will turn. This is what we must look for – ‘the feel of things’, the pressure as ridiculous as that is. Not strong economic data. I’m being very serious about that, it’s not a joke and these are the legitimate sign posts.

Look at the bank’s behaviour. Domestic demand has been strong for some time, well over a year – the unemployment rate is very low. And yet the RBA still cut. So, is the bank’s assertion that growth was stronger than expected material? I don’t think so and they qualified that statement by suggesting they still expect inflation to be within the band over the medium term. I think they should hike for sure, but there is no chance of that and the risk is they still cut. The enormous surge in building approvals yesterday shows the dangerous territory the RBA has taken us to – unnecessary for mine, but there you have it. Confidence is the only thing holding the property sector back and that can change very quickly. Policy is not calibrated appropriately for this risk, nor is the board likely to act should this turn eventuate – think back to 2010.

Outside of Australia it's interesting to note that Ireland plans to sell €500 million of Treasury bills on Thursday, interesting because it’ll be the first attempt to attract funds from the market since September 2010.

Looking ahead, data for Australia today includes retail sales and trade at 1130 AEST. Expectations are for a modest increase in sales of about 0.2 per cent. Remember though, and regardless of the outcome, this series only represents a small proportion of consumer spending overall and hasn’t even been a reliable guide to retail spending as characterised by the national accounts. Outside of that we see eurozone retail sales.

Don’t forget it’s the Independence Day holiday in the US so markets will be closed.

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.

Follow @AdamCarrEcon on Twitter.


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