SCOREBOARD: Risk run

Hopes for Fed stimulus spurred strong risk bids Wall Street, while Italy's bond auction was broadly positive.

Well they paid a bit more for it, as the bill auction foretold the night before, but the Italian government is still in a pretty sweet position when it comes to raising funds. They sold about €4.9 billion worth of bonds, not reaching their maximum apparently through the choice of the Italian Treasury.

Yields were higher, certainly, and the 3-year, for instance, went out at a yield of 3.89 per cent compared to 2.76 per cent in mid-March, which is only a bit more (50 basis points or so), than what Australia pays, with our pristine fiscal position and strong growth – whoops sorry, I was just foolishly looking at the economic data again – I meant to say this depression that we’re in.

In the secondary market, Italian and Spanish yields fell, with the 10-year down 13 basis points (5.4 per cent) and 5 basis points (5.82 per cent) respectively. This is still more elevated than what they were say a month ago, but an improvement nevertheless. Throw in stronger-than-expected industrial output in the eurozone, 0.5 per cent in February when -0.2 per cent was expected (back data revised down though), and there were good reasons to see European stocks bid. And they were – the Dax up 1.03 per cent, the CaC up 0.99 per cent and the FTSE up 1.3 per cent. The euro was then up 45 pips to 1.3187..

Across the Atlantic, Wall Street brushed off a pick-up in jobless claims (to 380,000 in the week to April 7 from 367,000) to also find a solid bid, and we saw the Dow and S&P500 close 1.4 per cent higher (12986 and 1387 respectively). Apart from generally better news out of Europe, Fed commentary from the extremist dove core of vice chair Janet Yellen and New York Fed president William C. Dudley, seems to have calmed fears that the Fed would engage sensible monetary policy. Despite the quite obvious acceleration in US economic activity, Yellen and Dudley both said that rates will remain low for some time – contrast this with more reasonable members who have noted the improved economic environment and said this may warrant higher rates. Now they didn’t hint at further stimulus, but this is most certainly the best assumption.

These Fed members alongside Bernanke, have a tendency to move the goal posts rather than be guided by the data. If the data improves, they just lower the bar for more stimulus. Recall that the bar for stimulus has been set so low now, that all we need to see is growth not accelerate further. Note the transition – it used to be that deflation was the justification for QE, or fear of a depression. Now, with growth above trend, inflation rising, employment growth accelerating and the unemployment rate falling some Fed members have simply said that a failure of growth to accelerate further from here would be justification enough. Really! Anyway, the prospect of more crack, or rather free crack for a longer period of time, was clearly a hit with the market – even the BoJ is promising more – the free flow of the good stuff. Ahh, central banking – what an absolute disgrace it has become. I wouldn’t mind so much, it’s just that, well, in this increasingly corrupt society that we live, I’m not seeing any of it. The Nasdaq otherwise rose 1.3 per cent (3055) while our very own SPI managed only 0.5 per cent (4318).

Commodities then had a pretty decent session, as you’d expect, free money from the world’s major central banks and there are rumours floating around that China’s GDP out today may show a number closer to 9 per cent – which by the by saw Australian dollar shoot up over $US1.04 (up 40 pips or so from 1630 AEDT). Anyways, gold was $17 higher to $1675 and crude was up 1 per cent on WTI ($103.7) and 1.4 per cent on Brent $121.9. Copper then rose 2.1 per cent and silver was 2.7 per cent higher.

As for debt, US treasuries did little – sold off slightly. The yield on the 10-year then rose 1.5 basis points or so to 2.051 per cent, the 5-year was just under a basis points to 0.89 per cent, while the 2-year was ½ basis point lower at 0.285 per cent.

Other than that, we saw US producer price data and while the headline was weaker, stable month-on-month in March (0.3 per cent expected) and 2.8 per cent year-on-year, core was higher, rising 0.3 per cent (0.2 per cent expected) with the annual rate at 2.9 per cent. The US trade deficit then narrowed in February to $46 billion (from $52.5 billion) as exports rose 0.1 per cent and imports fell 2.7 per cent.

Looking at the day ahead and as mentioned, Chinese first quarter GDP is out at 12 and the market forecasts 8.4 per cent, although a number closer to 9 per cent is rumoured. Alongside that we see industrial production and retail sales. Prior to that at 1000 AEDT, Singapore releases their GDP – bit of a bellwether for the region so worth a look. Apart from that we see the final estimate of German CPI (March) this afternoon at 1600. A short-time after that we get UK producer prices and then tonight, US consumer prices for March are out as is the April estimate of Michigan Uni’s consumer confidence index.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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