SCOREBOARD: Risk reward

The generally positive flow of economic data saw a strong risk bid in Europe, with the major indices rising between 2.4 and 2.9 per cent. The spike in prices continued upon release of the ADP employment report, which showed 91,000 jobs were created in America during August, and again after US factory orders rebounded 2.4 per cent in July ( 13.4 per cent year-on-year with shipments up 1.6 per cent month-on-month and 11.8 per cent year-on-year – strong data). Now the ADP employment report isn't a particularly great survey and it came in below expectations. But there is just so much pessimism priced in at the moment that I think punters were relieved that the number wasn't weak. Remember that there were fears the Verizon strike would deflate things, and that may still be the case, but at least this survey isn't backing the recession hysterics. US firms are making good coin, order books are full, global industrial production is solid and US consumers are spending.

Following on from Europe, the S&P spiked at the open, hitting a high soon after of 1,230 or 1.5 per cent. I'm not sure exactly why (newswires suggest it was fears QE3 won't be delivered) but US stocks were then offered for much of the session (down 0.3 per cent at the low) and it was only some last minute buying that saw the S&P close up 0.49 per cent (1,218). Financials, utilities and energy stocks were the key outperformers on Wall Street but most sectors (with the exception of telecoms) rose. The Dow rose 53 points to 11,613, the Nasdaq was up 0.1 per cent (2,579) while Australia's SPI rose 0.7 per cent (4,317).

In the fixed income space, US treasuries were weaker and yields rose 1bp on the 2-year (0.2 per cent), 5bps on the 5-year (0.97 per cent) and 6bps on the 10-year (2.23 per cent). Australian futures then sold off 8 ticks on the 3s (96.13) and 6 ticks on the 10s (95.56).

Price action elsewhere was mixed. The major forex moves were found in Europe with sterling and euro down about 63 pips or so to 1.6246 and 1.4371, respectively. The Swiss franc (0.8061 from 0.8166) was stronger after the government announced a $1.1 billion aid package to the tourism and export sectors to counter the 'massively overvalued' currency, noting that "we'll have to keep living with the strong franc for some time.” The Australian dollar and yen were little changed at 1.0695 and 76.62. Gold gave up around $11 from 1630 AEST yesterday to settle at $1,824. Crude was mixed, with WTI flat ($88.96) and Brent up 0.6 per cent ($114.7). Copper rose 1.4 per cent and softs were generally stronger.

In other news and data – German unemployment fell 8,000 in August, while the unemployment rate was steady at 7 per cent. Retail sales were unchanged in July after a 4.5 per cent gain the month prior. Then, the eurozone CPI was steady at 2.5 per cent in August. In Canada, GDP fell by 0.4 per cent in the June quarter, which was weaker than expectations, but net exports took off 5.7 percentage points from growth on the back of a drop in exports and a surge in imports. Domestic demand in contrast rose 3 per cent, which is a good number.

On the European front, the German cabinet approved new powers for the EFSF, including the ability to intervene in the bond market and provide precautionary lines of credit. The Bundestag votes on September 29. Then in Portugal, the government passed a new deficit reduction strategy that will impose a tax surcharge on high income earners in an effort to bring the budget deficit to 0.5 per cent by 2015 from its current 5.9 per cent this year. Finally, the EU is apparently urging a financial transactions tax and will try to persuade the rest of the G20, at a meeting in November, to adopt one.

Today, we get the ABS monthly retail survey for Australia at 1130 AEST and, more importantly, the capex survey. Now as regular readers know, I attach no importance to the monthly retail survey. Bluntly, it should be scrapped as it is giving a misleading impression of consumer spending and indeed is inconsistent with other indicators. As just one example, in the year to the March quarter, the national accounts tell us that food retailing rose 2.6 per cent in volume terms. The monthly retail survey, (which every quarter gives a volume estimate) shows much weaker growth, suggesting that annual growth was barely positive in the quarter. Putting it another way – the national accounts suggests that average quarterly growth of food sales in the four quarters to March was about 0.6 per cent. The survey we get today tells us there was no growth.

That's a fairly serious discrepancy and given the economic debate at the moment, one that should not be tolerated – it is merely one of many problems that shows how today's survey has been understating retail spending for well over a year. I highlight food in particular because the dominance of two stores should mean that there is some consistency. And we know that sales for both Coles and Woolworths have been solid in the food space. For mine then, the fault lays with today's survey yet it sits at the foundation of the weak consumer view. That's not to say that consumers aren't being more cautious, they are. It's all about magnitude though and this survey is at odds with strong incomes growth, low unemployment, company accounts and indeed, the national accounts. Yet, the ABS does nothing about it and indeed any revisions they make are to the downside – more consistent with newspaper reports and media alarmism I guess.

The capex numbers will be much more interesting. As I mentioned on Monday, my interest is in how the combination of media hysteria and political ineptitude around the world, has hit growth. 'Animal spirits' are widely regarded as a key determinant of investment and we know animal spirits aren't exactly high at the moment despite generally upbeat (notwithstanding supply chain disruptions) global economic data – tier one data that is. In the March quarter, investment was pretty good across the board with mining investment up 21 per cent year-on-year, as you'd expect, but I guess the real surprise has been the strength in non-mining investment, especially the 'other' component (reflecting investment in transport, rental and real estate services, construction, wholesale and other services), which is up 4.7 per cent over the year but has risen on average by 4.7 per cent per quarter over the last three quarters (which annualises to almost 20 per cent). If investment is to be hit, it will be here I suspect. We'll see what happens. My forecast is for a 2 per cent gain which is below the consensus forecast for a 4 per cent quarterly gain.

Tonight, the ISM manufacturing index will be the key release. Markets look for a fall to 48.5 from 50.9 which is a worry, as this is actually a good survey. Nevertheless, it is also unduly influenced by sentiment and tier one growth data continues to show a much more positive outlook (ie factory orders overnight). This leads me to think the ISM survey is giving a false signal, as these sentiment surveys often do, and that it will rebound over coming months.

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

Follow @AdamCarrEcon on Twitter.