Not a bad session last night although we’re not looking at any large moves – markets evidently cautious. I suspect some of the caution reflects the fact that people don’t really know what to make of China’s data. As you already know it came in as expected and we didn’t see any carnage in Asia yesterday – indeed stocks rose, albeit modestly.
Similarly commodities overnight didn’t really show much alarm at this China slowing story – copper was off 0.1 per cent, gold up smalls to $1283 and crude rose 0.4 per cent to $106.4 (West Texas Intermediate). More importantly for Australia, iron ore is pushing back toward $130 – up nearly $20 since a low in June.
The rhetoric is all about hard landings and credit crunches and so on: China could bring the world into another recession. But as I’ve mentioned before, logic tells people that growth at 7.5 per cent is still very strong – as is industrial production at around 9 per cent, investment around 20 per cent and retail spending around 13 per cent.
Depending on your starting point, China is three to four times the size it was pre-GFC. That’s why looking at a chart showing how China’s growth has slowed relative to the last decade – the slowest growth since the ‘90s, some say – is pointless. Those are the facts, and the narrative being spun is inconsistent with the maths. But picking how the other guy is going to react is difficult. So far it’s not been too bad.
Sentiment would certainly have been helped by a few other points. Firstly, there’s Fed Chairman Ben Bernanke’s promise of stimulus forever. Secondly, US data out overnight: retail spending remains robust and after a solid run increased another 0.4 per cent in June, with core sales up 0.1 per cent. Similarly, business sales were up a strong 1.1 per cent, while the Empire State Manufacturing Survey (for New York) rose to 9.5 from 7.8.
Then we had Citigroup report a 42 per cent lift in profits, and financials were a key outperformer for the session, just behind utilities and tech stocks. Overall the S&P500 managed to put on another 0.1 per cent (1682) with the Dow rising almost 20 points to 15,484. The Nasdaq in turn was 0.2 per cent higher.
Price action elsewhere was nondescript. The Aussie dollar is little changed at 0.9105, having hit a session low of 0.9040. It’s a similar story for the euro at 1.3063 (low of 1.2995), while the Japanese yen sits at 99.84. On the rates side, the US 10-year yield is down about 4.5 bps to 2.54 per cent.
There are a few bits and pieces otherwise. Europe seems to be quietening down – not so much in the political stakes but in terms of how markets are reacting. In Portugal there had been a debate about easing austerity, and now the talk is about how the main parties can agree to a pact to keep the bailout. The government said that if a pact is reached they will call early elections next year after Portugal exits the bailout program. In Spain, meanwhile, the prime minister is being constantly bombarded over corruption or ‘conniving with criminals’ and has rejected calls to resign. Against all that, European stocks rose and Spanish and Italian bond yields fell.
Finally, and across the Channel, the talk is of a new housing bubble following data showing UK house prices rising to a fresh, all-time high – while the country’s in a downturn, etc. This is insane right? And there is no chance the Bank of England will lift rates any time soon!
For the day ahead, the SPI suggests that local stocks will be up some 0.4 per cent. Then as to the data, we see the Reserve Bank of Australia’s minutes at 1130 AEST. As I mentioned yesterday I’m not expecting much out of these minutes. Following Governor Glenn Stevens’ side-splitting joke about deliberating for a long time on rates last month, I’m not really looking for any references to that being included this time around (even if they had).
Tonight we see inflation figures out of the US, Europe and the UK. In addition to that, US industrial production is worth watching, as is the German Zew survey.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.