SCOREBOARD: Raise the roof

The US decided to increase the debt ceiling, but it was solid earnings that kept the bull market charging.

It’s official now, the US debt ceiling has been increased. We are all saved and may I just say – God Bless America. Well it hasn’t actually been increased it’s been ‘suspended' until May, at which time it will be retrospectively increased. Ridiculous right? Yep, but this means that House Republicans don’t need to vote yay to a bill that increases the debt ceiling. Or something. Whatever – the debt ceiling has been increased.

The outcome was anticipated so we didn’t see much of a reaction, rather a sigh of relief (just sighs) or whatever from Wall Street. As I write (with an hour or so to go) modest gains are the order of the day, with the S&P500 up 0.2 per cent (1495), the Dow up 72 points (13,784) and the Nasdaq 0.3 per cent higher (3154). Truth of the matter is, if it wasn’t for some solid earnings reports from heavy hitters like IBM, Google and even AMD, the market would have been more mixed – like in Europe (Dax 0.2 per cent, CaC -0.4 per cent, FTSE100 0.3 per cent). But as it stands, results aren’t too bad, confidence is building, the stock market has had a good rally, and apparently deposits from major US banking institutions had their biggest fall in about 12 years, as a Federal Deposit Insurance program expired. They ended last year with $5.4 trillion in them and the expectation is that cash is making its way into stocks and other risk assets.

Now while equities just managed to stay in the black, commodities were weaker generally, crude especially so. WTI fell 1.4 per cent in trading overnight ($95.4) despite a report showing Chinese demand for oil is at a record – up 7.7 per cent annually in December. Otherwise copper fell 0.5 per cent and gold is off about $7 to $1685.

In the forex and rates space there wasn’t much. Euro is up smalls (1.3323), ditto for the Australian dollar (1.0550), the British pound (1.5843) and yen (88.65). Rates then did little and the US 10-year yield is at 1.836 per cent, the 5-year sits at 0.75 per cent, while the 2-year is at 0.25 per cent. Aussie futures were also little changed following yesterday’s post-CPI rally – with the 3s at 97.29 and the 10s at 96.725.

In other news and data, of which there wasn’t a lot, UK unemployment fell to 7.7 per cent in the three months to November, while 90,000 jobs were created. In the US, mortgage applications rose 7 per cent in the week to January 18, after a 15 per cent increase the week prior. Then the IMF issued an update to its World Economic Outlook, and reckons that world growth will be 3.5 per cent in 2013, up from 3.2 per cent last year and little changed from what they were expecting in October.

A quick word or two on yesterday’s inflation figures – they were weaker than expected sure, but the headline numbers aren’t really telling us anything different from last quarter. The core rates are little changed at 2.3 or 2.4 per cent, so I’m surprised that the numbers have rallied the rate cut call again. Treasurer Wayne Swan suggested once again that they gave the scope for the Reserve Bank to cut rates. Unfortunately some board members, such as Heather Ridout, seem only too happy to oblige with more rate cuts. She is quoted in The Australian as suggesting the economy needs to be "actively managed" this year and is of the view that we can’t "just sit back and wait for growth to be put in our lap”. Can’t help but note that the cash rate is already at a record low and that it hasn’t done much to weaken the Australian dollar or boost housing.

The challenge for Ridout and those who support that view, is to front up with some evidence. For more than a year now, policy instead has been guided by talk, anecdote and rumour – fear. To such an extent that none of the reasons, fears or justifications offered for the 175 bps worth of cuts over that period, ever came about. Not even one. Business Spectator’s very own Stephen Koukoulas had the strength of character to note he had been wrong the other day (Why rates have no further to fall, January 22), and it’s high time Heather Ridout and the rest of the Reserve Bank board made the same acknowledgement – because it is the truth.

The domestic economy has turned out a lot better than thought, as has the global economy. In my opinion, citizens deserve better than what the current board is offering. Rather than lies and mistruths dictating policy it’s time for facts – for evidence. At the very least Ridout should note that rate cuts to date have not weakened the Australian dollar, boosted the manufacturing sector she used to represent or lifted housing. She needs to reflect on that a little more I think and ask herself what lower rates would achieve that the current record low rates aren’t – all the board members do.

So the SPI suggests modest gains for the All Ords today of about 0.2 per cent. Then on the key macro front we see Japanese trade data this morning, while tonight we see the eurozone PMIs for January, current account data for the same region, while for the US, we get the Kansas City Fed manufacturing index.

That’s the lot, 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.

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