SCOREBOARD: Recovery jitters

US recovery concerns dominated the landscape last night, so risk trades were pulled in a bit. I can't say the data flow warranted these concerns, however. Durable goods (a great indicator for industrial production more generally) fell again and that certainly didn't help calm fears. Specifically, we saw a 1 per cent fall in June, which is the second drop in a row. Having said that, if you exclude volatile items (and we must), orders were flat and that follows a strong 1.6 per cent surge in May. So the actual picture being painted is still one of decent order flow, and to try and read weakness into these numbers is testing the limits of credibility.

It didn't stop there though. The Feds, in issuing the Beige Book, had to go and use the word 'slowed'. What were they thinking? Personally, I don't have a problem with the word, but as we know, there is tendency for the word slowed and double-dip to be used interchangeably. In any case, the Beige Book (anecdotal reports collected by the Fed) suggests that activity has continued to expand since the previous survey – ie. the economy improved since the last survey on June 9. Nevertheless, two districts suggested that the level of activity generally held steady and another two suggested "the rate of improvement slowed". It's still improving though, and this often gets lost in the rhetoric.

By sector, manufacturing continued to increase in most districts, as did the services sector. Consumer spending was described as being "generally positive", although in most districts the increases were modest. Conversely, commercial and residential real estate were noted as being sluggish while labour market conditions "improved gradually in several districts".

So, all up it wasn't a bad report, but equities weren't in the mood and weakened after it was released. Having hit a high in early trading (1114 or 0.2 per cent) the S&P then went off for the remainder of the session and closed down 0.7 per cent (1106). All sectors outside of telecommunications actually took a dip, with the main downside from healthcare, technology and financials. Elsewhere, the Dow dropped 39pts to 10497, the Nasdaq fell 1 per cent to 2264 while the SPI was 0.4 per cent lower (4489).

Rates then rallied with yields on the major T-notes down about 4bps (2s and 10s) and 8bps on the 5s. The bigger move on the 5s reflects a well-bid five-year T-note auction. $US37 billion was up for grabs and cover at 3.06 was the strongest in about four years. At the close, the two-year yield was 0.61 per cent, the five-year was 1.7 per cent and the 10-year settled at 3 per cent. Following a strong rally yesterday in the wake of that 'Claytons' dip in inflation, Aussie futures did little, travelling within a 5-6 tick range and ending only 1 tick higher. Three-years are at 95.32 and 10s at 94.80.

Just quickly on FX and commodities, USD bounced a bit with AUD down 12pips to 0.8936, the euro was off 15pips to 1.2993 and Sterling fell 21pips to 1.5588. Crude was down 0.9 per cent ($US76.82) after the US Energy Department reported a surprise lift in inventories over the week to July 23. Otherwise, Dr Copper pushed out another 1 per cent ( 10 per cent over the last week or so) while gold was up smalls ($US1163).

In terms of interesting news flow there were bits and pieces. The ECB suggested that from next year, collateral rules will be tougher. Not so much for sovs but weaker rated stuff like ABS etc. The ECB also reported that while banks are tightening lending standards in Q2, lending growth to consumers (and business) actually accelerated and banks expect higher loan demand next quarter. Still on central banks, the BoE governor then suggested that rates could go in either direction, although realistically I think an extension of QE is unlikely given inflation remains well above the band and the strong growth indicators to date. Finally, German inflation rose to 1.2 per cent y/y in July from 0.8 per cent.

The dataflow for the day includes the RBNZ at 0700 followed by the NZ trade balance at 0845. For Australia, HIA's new home sales series is out at 1100. Tonight, just watch out for US jobless claims (expected to remain steady) and the EC business climate indicator.

That's about the lot, have a great day.

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