SCOREBOARD: Rattle and shake

An initial cheer went out and European stocks bounced as the European Union gave Spain another year to meet its deficit reduction targets and signed off on €30 billion of aid – which should be received by the end of the month. Spanish yields subsequently fell, with the 10-year down 15bps to 5.94 per cent, because wracking up debt for longer is apparently good for bonds! But markets took it and the Dax ended 0.8 per cent higher, while the Cac was up 0.6 per cent ande the FTSE rose 0.7 per cent. The euro too was initially stronger and hit a peak of 1.23306 before the offer came on. The unit subsequently fell 80 pips to 1.2225, where it sits currently.

Over in the US, stocks initially followed the European lead, but it didn't last long. In the end, they took another beating as it looks like the earnings season has got off to a bad start. For last night two tech stocks reported disappointing earnings, and that seems to have rattled investors (which saw the Nasdaq off about 1 per cent at the close). Traffic was pretty much one-way from there except for a brief respite into the close, at which point the S&P500 was down 0.8 per cent (1341) and the Dow was 0.7 per cent lower (12653).

Commodities too had a rough ride and crude oil took a dip – and a fairly decent one at that – falling 2.5 per cent to $83.84 after the Norwegian government said it would resolve a labour dispute by compulsory arbitration. But commodities were hit across the board, following those Chinese trade figures yesterday. Gold was down $22 to $1566, silver fell 2.5 per cent and copper fell 1.2 per cent. Having said that, maybe it's all these regulatory probes into market manipulation that is chasing investors away. We know about Libor, but there are also probes into the energy market and now calls for an investigation into the gold market to accompany an existing investigation into the silver market (which has been ongoing for two years).

Price action elsewhere saw the Australian dollar up smalls to $US1.0189, while sterling was about 40 pips higher to $US1.5519. Then for rates, the US yields were little changed, with the 10-year at 1.50 per cent, the 5-year at 0.62 per cent and the 2-year at 0.27 per cent.

In terms of the data there wasn't much. We saw some industrial production figures out of Europe, which were mixed. In France, production fell 1 per cent in May (-4 per cent year-on-year) which was much weaker than the market expectation for -0.3 per cent. But then Italy and Britain recorded stronger-than-expected growth of 0.8 per cent and 1 per cent respectively (annual rates of -7 per cent and -1.7 per cent).

For the calendar today, we get Westpac's consumer confidence series at 1030 AEST. The data is for July and I guess there is no shortage of reasons why confidence would deteriorate further. It's a sad state of affairs. Following the RBA's ill-fated cuts, confidence is actually lower and we saw that again yesterday as business confidence fell further. As it stands, consumer confidence is already about 6 per cent below average. Obviously the carbon tax and the deep unpopularity of the government are weighing heavy, but interest rate cuts are not helping.

The truly amazing thing is that we still have economists calling for more rate cuts. The worry of course is that we may actually need rate cuts one day – but the RBA has jumped the gun and in a world where psychology and confidence are so important, you actually have the situation where rate cuts are detrimental (at this stage of the cycle). There are downside global risks and of course the damage the carbon tax will wreak on the economy (and it will damage the economy) is unknown at this stage – let's save the rate cuts until we need them. Then, if the worst doesn't happen we are in a better position to deal with the upswing. There are significant upside risks to global and domestic growth that most policymakers seem blissfully unaware of.

At 1130 AEST we get ABS home loans data. Prior to the RBA's cuts home lending had been on the path to a solid recovery, but the pace of that has slowed considerably of late. Indeed, so far for 2012, home lending has fallen on average by 0.7 per cent per month – and that's with 125bps worth of rate cuts. Prior to the RBA's easing cycle, home loans were rising on average by almost 2 per cent every month. This may seem counterintuitive, but only if you assume that policy responses are linear. The Federal Reserve does, which is why it falls into crisis after crisis. It doesn't know how policy works. For Australia, rate cuts would work if the price of money was the problem in the first place – but it wasn't. Confidence was (and is) the only problem. That's why lending has slowed subsequently, because if the RBA are cutting something must be wrong, right? Wrong. Don't forget that RBA Deputy Governor Philip Lowe speaks this morning at 900 AEST.

Then this afternoon we see German consumer prices, and the expectation is that inflation will moderate in line with CPI elsewhere, following the fall in commodity prices. Tonight, the key data is US trade and the FOMC minutes.

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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