SCOREBOARD: RBA 'rationale'

Not a lot of love was being dished out last night, except to US treasuries which appear to be on auto pilot. Good data, bad data, they push higher. It's as if the US government was buying its own bonds…oh that's right, they are. So the yield on the 2-year fell slightly to 0.52 per cent, the 5-year was down 3bps to 1.79 per cent and the 10-year fell almost 5bps to 3.12 per cent.

Admittedly the data out last night wasn't great – US industrial production was flat in April and housing starts fell 10.6 per cent in the same month. In both cases well below expectations for a 0.4 per cent rise and a 3.6 per cent rise respectively. As always though, just looking at the headline number isn't necessarily going to give you an accurate picture of what's going on. So for instance industrial production was weaker and there were some downward revision to back data. Yet supply disruptions to Japan and auto plant closures were largely to blame for the weaker number and are not likely to continue. Similarly, housing starts were weaker, but they are extraordinarily weak anyway given there is still a large stock of distressed houses to sell. It's no major shock and doesn't affect broader trends.

Nevertheless the data obviously isn't a cause for joy and so equities were again weaker, well mixed really, with the S&P down 0.04 per cent (1,328), the Dow off 0.55 per cent (12,479) but the Nasdaq up 0.03 per cent (2,783). By sector, financials, utilities and telecommunications stocks were stronger, but industrials, basic materials and tech stocks were weaker. Commodities for their part were mixed, with gold down smalls ($1,485), copper up 0.9 per cent and crude mixed with WTI up 0.1 per cent ($97.5) and Brent down 0.3 per cent ($110.5). In the forex space, Australian dollar was up 22 pips to 1.0628, euro was 58 pips higher to 1.4237 and sterling rose 47 pips to 1.6251.

In other news and data, it's worth noting an interview Dow Jones conducted with RBA board member Roger Corbett. Now I need to make clear that I haven't seen the full context of his comments and he seems to be talking more about the carbon tax than anything else in his commentary. But he did make some dovish comments which highlight my concerns about the RBA board and their ability or willingness to rise above the ever changing flow of public opinion and data volatility, focus on the medium term and just do their job – for the long-term interest of the country.

He regards Australia as a bi-polar economy and suggested that manufacturers and retailers were struggling. He then suggested that while there are "issues” that Australia will have to face going forward, Australia doesn't have an inflation problem. Moreover, he noted that the Australian dollar was one of the biggest constraining factors across the economy. Again I haven't seen the full context, but he didn't seem to really grasp the fact that, while inflation may not be bursting at the seams right now, the point was that all the indicators suggest inflation will be a problem in the very near-term and for some time on. Consequently, it would be prudent to act now to prevent greater pain down the track.

He also didn't note the positive influence the Australian dollar was having on the economy, especially for retailers. Retailers are now buying their goods from overseas much more cheaply than they were in the past and as yet don't really seem to be passing those benefits on to consumers. Indeed rather than fully cut prices, they make token gestures and have actually formed a coalition to try and push through tax changes – to tax small value, online imports which are currently GST free. The government has noted this would actually cost the country money given the costs associated with collecting the tax. That hasn't stopped the retailers though. Corbett, if anything, appears to be batting for them in this interview, rather than encouraging retailers to cut prices and compete properly. He hasn't encouraged them to pass on in full Australian dollar benefits to consumers, the benefits that retailers are enjoying. This would do much to lower inflation and spare the country further rate hikes.

Other than that, UK inflation surged higher in April, well above expectations of 4.1 per cent year-on-year to be at 4.5 per cent year-on-year. Core inflation surged to 3.7 per cent from 3.2 per cent which is a record high. It's clear nevertheless, that the Bank of England has dropped its inflation target with the Governor suggesting that there was little need to "hastily” raise rates. A position that is supported by the UK government. Gilts rallied.

In Germany, the ZEW survey showed the economic sentiment indexed slipped to 13.6 from 19.7 although the current situation index rose to 91.5 (record high) from 87.1.

That's about it. Today for Australia watch out for wage data at 1130. Wage growth is well below what the RBA considers a dangerous rate, yet pressures are slowly building. Prior to that we get consumer confidence at 1030 and given all the doom and gloom being spruiked it wouldn't surprise me if this is soft.

Tonight watch out for the BoE's minutes, UK employment data and the FOMC minutes.

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