SCOREBOARD: Rates riot

Markets panicked as central banks in Europe and China cut rates, while the BoE decided to print, leaving the euro especially bruised.

Central bankers might be best advised to go on an extended holiday. Three central banks all engage more stimulus(li) – within 45 minutes of each other – and the market takes risk off the table. And that’s with more positive data flow. The euro, in particular, was hit hard, falling almost 2 cents to 1.2386 – although moves more generally weren’t as severe.

Now the ECB’s decision to cut by 25bps to 0.75 per cent wasn’t so much a surprise, nor probably was the BoE’s decision to print another €50 billion. However I don’t think there were too many people expecting the People's Bank of China to come out and join the party, cutting the 1-year lending rate 31bps to 6 per cent.

I’m sure central bankers and their governments think they were doing a good thing. Trying to boost confidence with coordinated action and all that. The trouble is their actions are just panicking people. It’s like in Australia when the RBA cut rates and business and consumer confidence actually deteriorated after. Seeing policymakers panic like this alarms people, and the worst part of it is, most sane know that these actions are futile.

This is implied by the fact bankers feel compelled to continually undertake more useless stimulus. Which obviously didn’t work the first 10 times (or whatever). The fact they feel they need to do it again shows they don’t know what else to do – ‘Don’t panic people everything is under control! Remain calm’. What are rates at 0.5 per cent or 0 per cent going to achieve that a cash rate of 1 per cent couldn’t? The answer is nothing. For Britain at least they are simply monetising some of their debt, interest repayments or what have you. Their decision wasn’t ever about anything else. But the ECB’s move will achieve nothing, and it would have been good if the PBoC maybe waited a week or two?

Well maybe the ECB didn’t achieve nothing exactly – Italian 10-year bond yields surged over 20bps to 5.96 per cent, but I’m not sure that was the intent. Spanish yields for their part were up something like 7bps to 6.5 per cent. Something clearly isn’t right when bonds can sell off so aggressively on disappointment the ECB didn’t print a quadrillion billion euro. I mean this is ridiculous, these price moves aren’t being driven by fundamentals or any assessment of Italy’s capacity to repay.

Otherwise, bonds in ‘safe havens’ like the US and UK didn’t do much. Indeed, US treasuries ended little changed with the 10-year at 1.59 per cent, the 5-year at 0.67 per cent and the 2-year at 0.28 per cent. Aussie 3s and 10s for their part were off 5 ticks or so to 97.51 and 96.96.

As for equities, European stocks all ended weaker, especially Spanish stocks, which fell 3 per cent. Moves elsewhere weren’t quite as bad with the Dax off 0.5 per cent, despite a 0.6 per cent lift in May German factory orders (0 per cent expected). Then the CaC was down 1.2 per cent, and the FTSE even managed to put on 0.1 per cent, boosted by mining stocks following the PBoC’s decision. Having said that, commodities themselves were generally weaker in New York and in particular, gold was off $18 to $1604, copper fell 1.5 per cent and crude dipped 1.1 per cent to be at $86.7 (WTI). Perhaps that’s why the Aussie SPI saw no love and ended 0.2 per cent weaker (4125).

Over on Wall Street, the S&P finished the session 0.5 per cent (1367) weaker and didn’t really take much joy at all from more positive jobs data. Now recall we have payrolls tonight and it’s fair to say that none of the indicators we saw last night have a great correlation with payrolls. That said, the news was good and jobless claims fell about 14,000 in the week to June 23 to 374,000. In addition to that we saw the ADP employment report come in much stronger than expected, with jobs growth of 176,000 for June (versus the 100,000 expected). Despite this, stocks hit a low not long after the data and the S&P500 was off 0.8 per cent at that point. Elsewhere, the Dow closed 0.4 per cent weaker (1367) although the Nasdaq was flat (2976).

Bits and pieces otherwise. Against all that, the Australian dollar pushed high – about 20 pips to 1.0289. Then for the data, the US non-manufacturing ISM shows that sector continued to expand in June with the index at 52.1, although that is lower than May’s 53.7. Then US chain store sales rose a modest 0.2 per cent year-on-year to June, although falling gasoline prices account for a large chunk of that. And then of course the luxury segment is doing very well, with sales up 7.6 per cent.

Looking at the day ahead, there isn’t really any Australian data worth noting and of course the big data piece is US payrolls. The market looks for an increase of 95,000 in June but there is probably some upside to that following recent data. In addition to that it’s probably worth watching out for UK producer prices and German industrial production.

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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