SCOREBOARD: Sales brakes
A surprise drop in US retail spending saw Wall Street soften while European bourses managed to stumble along.
Well, if the prospect of Greece leaving the eurozone and Spanish banks collapsing all over the place wasn't enough, the US consumer has decided, all of a sudden – and following a binge earlier in the year – to stop spending, apparently. Sales fell 0.2 per cent in the month of May, following a 0.2 per cent fall in the month prior, which has got all manner of people talking about a recession again.
Still, the result follows some decent growth in the first three months of the year such that sales are some 5.3 per cent higher annually. Personally, I think it's best not to get carried away by volatile data and start making alarmist calls about double dips, stall speed or what have you. The US data flow has slowed, without doubt, but this is normal. As I've said repeatedly, growth rates don't keep on rising exponentially, they bounce around.
That said, the data does have important implications. It increases the odds of the Fed printing again. This is the best bet even when data is strong and picking up. Recall that a solid data flow didn't stand in their way in 2010 and is unlikely to now – so when it softens?
But inflation is above target, I hear you say? Yes it is, but that is true in many economies and yet interest rates are still at record lows. While the Fed might like to remind everyone about their dual mandate, they consistently play inflation down. That should give you a clue as to what they really think of the duel mandate at the moment. Indeed, current rate settings are not consistent with it, that much is obvious.
So expect QE3, only the timing is uncertain but the recent dataflow and the end of Operation Twist suggest it could be soon. Certainly, gold punters are gearing up for it and gold pushed up another $6.40 overnight to $1620. Similarly US treasuries were generally bid with the 10-year yield falling about 4 basis points to 1.6 per cent, while the 5-year was down 2 basis points to 0.7 per cent. The 2-year in contrast sold off, given further Fed action in Twist overnight and punters perhaps expecting an extension of that program. But moves were modest at less than a basis point (with the 2-year at 0.28 per cent).
In the equities space, US stocks had a fairly dire session and the major indices all ended weaker. The S&P500 was off 0.7 per cent (1314), the Dow fell 0.6 per cent (12496) and the Nasdaq was off 0.9 per cent (2818). All sectors look to have ended lower, although tech and energy stocks were the hardest hit. It's not like crude had an especially savage night or anything though. Crude prices were lower in New York, true enough, but WTI was only down about 50c to $82.50 in the end and at one point was even up $1. That's when the retail sales data came out and put the kybosh on.
The Europeans weren't as easily spooked as their American colleagues, for last night at least, and the Dax ended 0.1 per cent lower, the CaC was 0.6 per cent lower and the FTSE even managed to put on 0.2 per cent. The news flow here was same old really. The game of chicken between Greek leftists (Syriza) who may win the election (or not) and the rest of Europe continued last night. Party leader Alexis Tspiras still reckons the bailout will change if he wins and the austerity program will be reduced – but he is adamant that Greece will stay in the eurozone.
The Europeans, in turn, said they will only allow very small changes to the agreement and that if the Greeks try to make large changes or renege, the money will dry up. Punters read this as indicating there was scope to negotiate – which in all sincerity is the best guess at this stage – and the euro shot up. Over a big figure, actually, to 1.2560.
While we're on forex, the Australian dollar followed suit and pushed up another 40 pips to 0.9940, while sterling sits at 1.5510 (about 40 pips weaker) and yen at 79.44. Back to Europe though, Spanish and Italian bond yields ended mixed with Spanish yields off a bit (6.71 per cent from 6.75 per cent) and Italian yields up (to 6.12 per cent from 6.02 per cent). Italian bonds rose as an auction of €6.5 billion bills saw 12-month yield spike to 3.97 per cent (a six-month high) from 2.34 per cent last month. Still, the auction saw strong demand (cover at 1.7 times).
There's not much else really. In terms of the data, US producer prices fell 1 per cent in May to be 0.7 per cent higher annually. Core PPIP is 2.7 per cent higher annually. Then US business inventories rose by 0.4 per cent in April, while sales rose 0.2 per cent. Over in Europe, industrial production fell by 0.8 per cent in April, following a 0.1 per cent fall, to be 2.3 per cent lower annually. Finally, the RBNZ kept rates unchanged this morning at 2.5 per cent.
The calendar today is quite light with nothing really in our region except the final estimate of Japanese industrial production for April. Tonight the Italians auction off some debt, we see eurozone CPI for May and US consumer prices for May also. In addition to that we get the US current account balance and initial jobless claims.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
Still, the result follows some decent growth in the first three months of the year such that sales are some 5.3 per cent higher annually. Personally, I think it's best not to get carried away by volatile data and start making alarmist calls about double dips, stall speed or what have you. The US data flow has slowed, without doubt, but this is normal. As I've said repeatedly, growth rates don't keep on rising exponentially, they bounce around.
That said, the data does have important implications. It increases the odds of the Fed printing again. This is the best bet even when data is strong and picking up. Recall that a solid data flow didn't stand in their way in 2010 and is unlikely to now – so when it softens?
But inflation is above target, I hear you say? Yes it is, but that is true in many economies and yet interest rates are still at record lows. While the Fed might like to remind everyone about their dual mandate, they consistently play inflation down. That should give you a clue as to what they really think of the duel mandate at the moment. Indeed, current rate settings are not consistent with it, that much is obvious.
So expect QE3, only the timing is uncertain but the recent dataflow and the end of Operation Twist suggest it could be soon. Certainly, gold punters are gearing up for it and gold pushed up another $6.40 overnight to $1620. Similarly US treasuries were generally bid with the 10-year yield falling about 4 basis points to 1.6 per cent, while the 5-year was down 2 basis points to 0.7 per cent. The 2-year in contrast sold off, given further Fed action in Twist overnight and punters perhaps expecting an extension of that program. But moves were modest at less than a basis point (with the 2-year at 0.28 per cent).
In the equities space, US stocks had a fairly dire session and the major indices all ended weaker. The S&P500 was off 0.7 per cent (1314), the Dow fell 0.6 per cent (12496) and the Nasdaq was off 0.9 per cent (2818). All sectors look to have ended lower, although tech and energy stocks were the hardest hit. It's not like crude had an especially savage night or anything though. Crude prices were lower in New York, true enough, but WTI was only down about 50c to $82.50 in the end and at one point was even up $1. That's when the retail sales data came out and put the kybosh on.
The Europeans weren't as easily spooked as their American colleagues, for last night at least, and the Dax ended 0.1 per cent lower, the CaC was 0.6 per cent lower and the FTSE even managed to put on 0.2 per cent. The news flow here was same old really. The game of chicken between Greek leftists (Syriza) who may win the election (or not) and the rest of Europe continued last night. Party leader Alexis Tspiras still reckons the bailout will change if he wins and the austerity program will be reduced – but he is adamant that Greece will stay in the eurozone.
The Europeans, in turn, said they will only allow very small changes to the agreement and that if the Greeks try to make large changes or renege, the money will dry up. Punters read this as indicating there was scope to negotiate – which in all sincerity is the best guess at this stage – and the euro shot up. Over a big figure, actually, to 1.2560.
While we're on forex, the Australian dollar followed suit and pushed up another 40 pips to 0.9940, while sterling sits at 1.5510 (about 40 pips weaker) and yen at 79.44. Back to Europe though, Spanish and Italian bond yields ended mixed with Spanish yields off a bit (6.71 per cent from 6.75 per cent) and Italian yields up (to 6.12 per cent from 6.02 per cent). Italian bonds rose as an auction of €6.5 billion bills saw 12-month yield spike to 3.97 per cent (a six-month high) from 2.34 per cent last month. Still, the auction saw strong demand (cover at 1.7 times).
There's not much else really. In terms of the data, US producer prices fell 1 per cent in May to be 0.7 per cent higher annually. Core PPIP is 2.7 per cent higher annually. Then US business inventories rose by 0.4 per cent in April, while sales rose 0.2 per cent. Over in Europe, industrial production fell by 0.8 per cent in April, following a 0.1 per cent fall, to be 2.3 per cent lower annually. Finally, the RBNZ kept rates unchanged this morning at 2.5 per cent.
The calendar today is quite light with nothing really in our region except the final estimate of Japanese industrial production for April. Tonight the Italians auction off some debt, we see eurozone CPI for May and US consumer prices for May also. In addition to that we get the US current account balance and initial jobless claims.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
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