Take Europe, where the carnage began. Industrial production slumped in September, to be down 2.5 per cent, which is the biggest fall since 2009 (down 2.3 per cent annually). In addition to that, we saw some union organised protests in Portugal, Spain and Greece – over austerity naturally, and investors took flight (the major indices here were off 0.9 per cent on the Dax, and CaC and 1.1 per cent on the FTSE. About the only saving grace was that Italy had no trouble raising cash at a bond action.
Indeed the 3-years went out at the lowest yields in over two years. A total €3.5 billion was up for grabs and they went out at 2.64 per cent compared to 2.86 per cent last month, with demand about 1.5 times the offer. A 10 and 15-year bond (first offer) was also auctioned off, with demand again around 1.5 times. There wasn’t much of an impact on the secondary market though with Italian 10-years unchanged at 4.9 per cent, while the Spanish equivalent was up over 5bps to 5.88 per cent.
Cue the US open, where stocks pushed ever so slightly higher before the big sell came on. Most of the damage was done in a little over an hour – on European concerns and then news that Obama wants to raise $1.6 trillion over 10 years in tax revenue. The fear is that the Republicans, who had maintained a conciliatory tone, may not agree to this. Moreover, Treasury Secretary Geithner is saying that Obama’s plan would indeed involve increases to tax rates, which the Republicans have expressly ruled out.
All of this drama overshadowed what I think was actually quite positive data out of the US and some reasonably upbeat FOMC minutes. The data first – US retail sales fell 0.3 per cent, which was slightly more than the 0.2 per cent expectation, but the reason why I don’t think that’s a bad thing is because it's all due to the recent storm activity that hit the East Coast. It’s October data. More to the point, sales ex-autos and gas were actually stronger: unchanged in the month compared to an expectation for a 0.2 per cent fall.
Then I’m looking at US business sales which rose 1.4 per cent in September, while inventories rose 0.7 per cent – sales and inventories rising together is a very good sign. Everyone still looks for the Fed to start buying Treasuries outright again in early 2013. In fact the Fed pretty much told us that, noting "A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity extension program in order to achieve a substantial improvement in the labour market."
Now as to those FOMC minutes, the economy was viewed as having expanded at a moderate pace – not new news. However, the FOMC noted in particular that consumer credit expanded ‘briskly’ in August – the FOMC staff even revised GDP growth higher. This is all good and should be the real focus for mine. Forget the rhetoric on jobs and unemployment. The Fed are ridiculous on this front. Jobs growth is strong and the unemployment rate is coming down – it was always going to take a long time to get the unemployment rate down given the magnitude of job losses. The real story is "real personal consumption expenditure rising at a solid pace”, and the fact that housing market conditions improved. This is the real story for me, not the rhetoric the Fed uses to justify why it is monetising debt. Everyone still looks for the Fed to start buying Treasuries outright again early 2013.
In any case price action elsewhere was muted. Actually that’s not entirely true as crude rose 1 per cent ($86.26) as Israel launched an attack on Hamas targets. But otherwise gold was down smalls ($1724), copper fell 0.7 per cent while in forex we saw euro up smalls to 1.2738, with the Australian dollar down about 70pips to 1.0375.
There were a few other news headlines that were interesting – S&P reckon that Australia’s AAA credit rating could be under threat and suggest we have similarities with Spain. This is just wrong. Pure and simple and the only thing I can think of is that some hedge fund must be short Australia. You can put those kind of comments right up there with their ratings of CDOs. Elsewhere, a group of investors are calling for Citigroup to be broken up, noting the stock has consistently traded below book value for about four years.
The Australian consumer confidence numbers we saw yesterday were noteworthy for a number of reasons. Firstly, because confidence is now at its highest level in about 1.5 years, which is a good thing. The second thing to note is that the 5 per cent gain occurred in a month when the Reserve Bank held rates steady and was slightly more upbeat in its assessment. At the very least the board started questioning whether things were really as bad as they thought – outside of Europe – and voila! Mysteriously confidence picked up. So confidence falls when the RBA cuts rates and rises when they don’t. See any emerging patterns? Obviously consumers were not disappointed in that decision and in fact took heart in it, which isn’t that weird. I mean if the Reserve Bank is slashing rates to GFC levels, that’s a reason to panic right? The GFC, people! All of that strong demand and low unemployment rate stuff the ABS produces must be a fiction right? It's all going to evaporate.
Looking at the day ahead, Australian futures suggest stocks will fall 0.7 per cent today, while the 3-year debt futures rose 3 ticks (97.50), with the 10s up 2.5 (97.045). The only data worth noting for Australia is car sales at 1130 AEDT – they're currently at a record or close enough to. Tonight we see some European GDP and inflation figures and UK retail sales. US data includes things like CPI, jobless claims, the Empire manufacturing index and the Philly Fed index. Bernanke also gives a speech.
That’s about the lot, have a great day…