The performance of US equities may not reflect it, but last night’s data was actually very positive. US retail sales in particular were much stronger than expected, rising 0.8 per cent in July compared to an expectation for 0.3 per cent.
This is the best result in five months. Sales excluding autos and gas were even stronger, if just a bit, rising 0.9 per cent. This is all very positive and follows that rebound in US jobs that we saw. I highlighted in my Eureka Report column this week why people like Roubini were wrong and why even the Federal Reserve were underestimating US growth prospects. Last night’s data firms up that view.
Yet US stocks finished flat-ish and at the high were only up 0.4 per cent on the S&P 500. Go figure. So the S&P 500 finished down 0.01 per cent (1403), with the Dow up 0.02 per cent (13172) and the Nasdaq down 0.3 per cent (3012). By sector, consumer stocks and health care outperformed the index, while basic materials and tech stocks underperformed. I’m not 100 per cent sure what drove stocks down in the end, there are a few stories running around that it was a press article suggesting Greece was seeking a two-year extension on its austerity programs – but then again we already knew this.
European equities had a better session of it (Dax up 0.9 per cent, CaC up 0.7 per cent and FTSE up 0.6 per cent) and that’s with data showing the eurozone is close to a recession! Why? Because the said downturn is indeed proving to be a modest one and in fact Germany continues to post okay growth with GDP up 0.3 per cent in the quarter, while France managed to avoid a recession (albeit barely) with growth of 0 per cent.
This is extremely important for two reasons. One, the European downturn is probably already at or near the trough and the odds of a severe downturn are now much reduced. Secondly, because Europe’s contribution to global growth (not their economy, but their contribution to growth) is so minor a modest recession simply doesn’t matter.
Add to that that Greece managed to tap the market for funds and European punters relaxed a bit. Indeed Greece managed its largest debt sales in two years, selling just over €4 billion worth of 13 week bills at a yield of 4.43 per cent with bids 1.4 times what was on offer. This probably contributed to the 16 bps or so drop on the Spanish 10-year bond (6.7 per cent), while the Italian 10-year was down about 10 bps or so to 5.74 per cent.
Elsewhere on the rates side, the US 10-year yield rose 7 bps to 1.73 per cent, the 5-year was almost 4 bps higher to 0.75 per cent and the 2-year rose a couple of bps to 0.28 per cent. Australian futures in turn fell 3 or 4 ticks with the 3s at 97.24 and the 10s at 96.74.
That brings us to forex and commodities and there wasn’t much going on. Moves for commodities were mixed and small overall, with crude up 0.6 per cent ($93.3), copper down 0.2 per cent, and gold down about $11 to $1601. The Australian dollar was then weaker, falling about 50 pips after the stronger US retail sales figures, to sit just below 1.05 at 1.0488. The euro ended about 40 pips lower at 1.2322, while sterling followed suit down about the same to 1.5676.
There were a few other interesting data points, notably UK inflation, which spiked higher in contrast to the expectations of City economists and the BoE, who have incorrectly suggested every year now that the lift in inflation would prove temporary would come down. Fact is inflation remains elevated and above target – during a recession. For July, CPI rose 0.1 per cent with the annual rate up to 2.6 per cent year-on-year from 2.3 per cent year-on-year. Predictably, most economists are continuing with the line that it is temporary.
In the US, we saw producer prices rise a stronger than expected 0.3 per cent (0.3 per cent expected and core at 0.4 per cent) with annual price gains at 0.5 per cent or 2.5 per cent ex food and energy.
The calendar today is relatively busy again with Australian wages data at 1130 AEST. The market looks for an increase of 0.9 per cent. Just prior to that we get consumer confidence numbers at 1030 AEST. Yesterday’s spike in business confidence is a good omen. The bounce was obviously due to a few things including data showing the economy was much stronger than expected, and the RBA’s decision to reinforce this positive data by not panicking for a change. Fact is that confidence can’t improve if the RBA is needlessly (emphasis on needlessly) slashing rates, yesterday’s business confidence numbers highlight this fact.
Looking abroad, the BoE’s minutes are released and aren’t even worth reading in the light of last night’s inflation numbers. The UK has an inflation problem, it hasn’t been temporary and the MPC have failed firstly to contain inflation and secondly to promote growth – which by the way are one and the same goal as most economists seem to have forgotten. Unemployment follows and then for the US, the major data includes consumer prices for July, the Empire manufacturing index and industrial production.
