SCOREBOARD: Moody markets

It appears that discussions Greece is having with Europe about its commitment to reform have overshadowed formal agreement at the European Summit to introduce Europe's permanent bailout fund (due to take place in July, with treaty changes to follow). Germany wants closer European monitoring of Greece so that they adhere to their agreements, to which the Greeks have said no. And so the talks continue.

European stocks all ended in the red – Dax off 1.04 per cent, CaC down 1.6 per cent and FTSE off 1.09 per cent, while euro lost about 55 pips (a big figure at the low) to sit at 1.3124 as I write. Similarly, Italian and Spanish bond yields rose – about 20bps on the Italian 10-year to 6.09 per cent and 8bps on the Spanish 10-year to 5.04 per cent. Not quite up there with the 217bps jump in the Portuguese yield to 17.4 per cent, but still. Talk in the media is that Portugal will have to restructure its debt now.

The negative mood then flowed across the Atlantic and hit Wall Street reasonably hard as well. For instance, at the low the S&P was down 1.2 per cent. Sure, a bid did develop from there, but as I write the index is still off 0.3 per cent (1312) and that's with some reasonably positive economic data. Personal incomes for a start rose 0.5 per cent in December which was above the median market expectation for a 0.4 per cent rise. Personal spending was flat (weaker than the 0.1 per cent expectation) so that the savings rate rose to 4 per cent from 3.5 per cent. Then we saw some good news on the manufacturing front with the (admittedly lower tier) Dallas Fed manufacturing survey spiking to 15.3 from -3.

'Not good enough' was the judgement from the market, as financials, energy and utilities led the S&P lower. The Dow for its part is off 131 points to 12638, the Nasdaq is down 0.2 per cent (2811) while the SPI is off smalls (-0.05 per cent to 4243). Commodities didn't really have much of a session either. Copper is off 1.6 per cent, silver 1.1 per cent while gold fell a few bucks to sit at $1729. WTI and Brent were both down about 0.7 per cent to $98.8 and $110.7 respectively.

Where I am surprised, although I guess I shouldn't be any more, is the rally in treasuries. The Fed formalised its inflation target of 2 per cent we are told and yet as the headline PCE comes in stronger than expected again in December (2.4 per cent year-on-year versus 2.3 per cent, from 2.5 per cent year-on-year) we see the US 10-year treasury yield down about 3bps to 1.835 per cent. The 5-year is off another basis point or so to 0.728 per cent while the 2-year did little and sits at 0.211 per cent. Core inflation for its part accelerated in the month, rising 0.2 per cent compared to expectations for a 0.1 per cent rise. Annually, core inflation accelerated to a 1.8 per cent annual pace from 1.7 per cent.

In other news and data, German CPI fell 0.4 per cent in January after a 0.7 per cent rise in December to be 2 per cent higher annually (from 2.4 per cent year-on-year). Still in Europe, the business climate indicator rose to -0.21 from -0.32 (average 0.07) with economic confidence up a point to 93.4 (average 98.7). About the only Fed speak we got was from Plosser who said he'd like to see rate hikes in 2012 and is concerned the Fed more broadly is still talking about more stimulus, arguing instead for patience – it's a virtue so they say. Finally, the Fed's Senior Loans officers survey suggests loan demand picked up in January although foreign banks with US operations were tightening credit. Not surprisingly, US banks noted less competition with these foreign banks.

Looking at the day ahead, the dataflow kicks off with NZ building permits at 0845 AEDT. South Korean industrial production follows at 1000 AEDT. At 1130, the Australian data comes in and we get NAB's business survey for December and RP Data-Riskmark's house price series (also December). Tonight, watch out for German employment data and in the US we get consumer confidence and house prices.

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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