SCOREBOARD: Phenomenal growth

Yesterday we learned that the Australian economy – well the domestic part of it – expanded at its fastest pace in almost three years. This is phenomenal growth and while the fiscal stimulus is a good chunk of it, to focus purely on that is a mistake. It overlooks the very strong growth in private demand and leads to incorrect conclusions regarding the importance of the fiscal stimulus in driving private sector spending. Unfortunately, it's an all too common view and the implication is that growth is going to moderate from here as the fiscal stimulus fades.

Note however, the similarities to last year's consumer fade argument – that in the absence of cash handouts (or fiscal stimulus) consumption would drop off. That argument came to nothing and, rather bluntly, it's just as wrong this time round. As we've seen, household consumption didn't fade and in contrast, spending remained robust throughout 2H09. That alone should be enough for people to question the efficacy and certainly the persistence of ongoing fiscal fade arguments. I'll go into more detail over the next couple of weeks, but as I discussed last year, the assumption is flawed.

That aside, more good growth news was to be found last night, and while the rest of the world may not quite be in the same zone as Australia, we are seeing the global recovery gain some serious traction. For instance the non-manufacturing ISM survey showed a decent jump in the services sector - the index (at 53 from 50.5 in January) now at its highest in over 3-years. This joins the manufacturing ISM to show a solid recovery underway in the US.

Moreover, the Fed's Beige book continued to improve in February – 9 districts (of 12) reporting increased activity or improved conditions and that's despite the snow storms. Obviously in the absence of these storms activity would have been stronger, so there is certainly an element of pent up demand occurring. Manufacturing was reported as having increased in most districts and similarly consumer spending was generally reported as showing signs of improvement – with some districts noting the storms impacted activity. Real estate activity was noted as being mixed and impacted by the weather. On the flipside, the big negatives were on loan demand and commercial property (both noted as weak).

So far so good and the market generally liked what they saw. Well, initially at least. European markets certainly had a solid session with the major indices up between 0.7 and 0.9 per cent. A combination of factors helped things here. Firstly, the Greeks outlined a new austerity package – freezing pensions, cutting pay and increasing taxes. Then secondly, commodity prices got a decent boost overnight which was great for miners – partly currency related with the dollar-index falling 0.5 per cent.

So crude contracts on Nymex were up about 1.5 per cent ($80.8), nat. gas up 1 per cent, gold was up smalls ($1139) while base metals continued to bounce with copper up 1.2 per cent, nickel up 4.7 per cent and zinc up 2.3 per cent.

That momentum was initially passed across the Atlantic and the S&P500 hit a high of 0.7 per cent (1125) before going offered after the Beige book. From a macro perspective there was very little bad news that shouldn't have already been priced by the market and overall it was a more positive report, yet the focus was on loan demand and the comments on commercial property, so we've seen this retrace a bit. As I write, the index is up 0.1 per cent (1119) with basic materials, consumer goods and energy the main drivers. On the downside were healthcare, consumer services and telecommunications. Otherwise the Dow was flat (10405), the Nasdaq was up 0.05 per cent (2281) and the SPI was 0.3 per cent higher (4763).

Again there was very little activity on the rates side. Treasuries traded in a 4/5 bps range and yields are little changed from yesterday afternoon. The 2-yr yield is at 0.81 per cent, the 5-yr is at 2.27 per cent and the 10-yr is at 3.62 per cent. Not much more to say on Aussie futures, in a range of 3/4 ticks they are 1/2 ticks higher on the 3s (95.18) and 10s (94.54).

Other news and data was generally more positive – the ADP employment report showed a modest decline in US Feb employment (-20k) which is statistically insignificant from zero and at a time of the snow storms. Mortgage applications bounced 15 per cent (refis and purchases both strong) and in the UK, the services PMI jumped to 58.4 in February from 54.5 which is the highest since January 2007. On the negative side, Euro-zone retail sales dipped 0.3 per cent in January, after a 0.5 per cent rise in December.

In Australia today there is only minor data – trade balance at 1130. So we have to wait for tonight to see anything meaningful. In that regard there is quite a lot. In the US we see jobless claims, factory orders, pending home sales and chain store sales. This is all January/February data and so will probably be impacted by weather.

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