SCOREBOARD: Sapped sentiment

Well, the good news is that some of the growth indicators out over the last 24 hours belie the growing pessimism on the global economy. China's non-manufacturing PMI rose to 59.6 in July from 57, which isn't too far of its recent peak of 63 and is above the average of 57.5. Similarly in the UK, the services PMI rose to 55.4 in the month from 53.9, which is also above the average of 53.5 and the second highest result this year (average in 2010 was about 54). Admittedly, the news for the US services sector was more mixed. The headline index dipped to 52.7 in July from 53.3 which is the lowest result since this time last year and the index is now just below the average of 53.8. Nevertheless, within that, the production index rose and also the ISM-adjusted measure rose slightly to 53.5 from 52.3. So overall, this isn't a bad outcome.

At the same time, these data points aren't a strong signal that all is well. As I mentioned the other day, I'm the most worried I've been for a while, although I certainly think market pessimism is completely over the top. In particular those downward revisions to US GDP and the sharp fall in the manufacturing ISM are concerning. The ISM is actually a good and reliable survey. Yet there is also good evidence to suggest that sentiment (poisoned by European and US debt concerns) may be affecting the results, which is why I'm not convinced the world is ending. For a start, global trade and industrial production remains robust and in the US, core factory orders are solid, rising 0.4 per cent in June after a 1.4 per cent rise in May. The headline index fell 0.8 per cent but this was largely due to defence and transport. Annually, orders are up a strong 12.5 per cent and shipments too are good, core shipments rising 1.1 per cent after a 1.7 per cent rise in May. So you can see my dilemma and why I am reluctant to buy into the hype. It is most likely, as I mentioned yesterday, that with all the data that we have at hand, that the apparent weakness reflects nothing other than quirks of the statistics, disasters, and fear over sovereign debt.

At the end of the day then, my fears over the global economy are largely political in nature as these sovereign debt concerns are largely a political issue. I think policymakers and politicians are at the cusp of stuffing things up completely. Left to its own devices the free market would heal. But we've got the Fed (QE3 coming our way soon), and incompetent politicians doing their utmost to ensure it doesn't. Few would disagree that if we could eliminate this never ending European debt saga, that this would remove one the largest sources of market pessimism. The US debt saga was just incomprehensible. Yet, on it all goes, sapping sentiment all the way. Markets have no faith in policymakers and this was acknowledged by the EU last night, although thankfully Italian and Spanish yields eased slightly.

The market more broadly had a mixed session, with stocks in Europe being trashed (major indexes down 2-2.3 per cent) but managing modest gains on Wall Street. It was a whippy one, and at the low the S&P was down 1.6 per cent, nevertheless a bid developed midsession and the S&P managed to finish up 0.5 per cent (1,260). Telecommunications, tech, industrials and financials were the key outperformers (gains over 0.8 per cent), while energy stocks fell, largely due to fairly hefty crude declines (WTI off 2 per cent to $91.93 and Brent off 2.7 per cent to $113). The Dow then put on about 30 points to 11,896, the Nasdaq rose 0.9 per cent and the SPI was 0.3 per cent higher (4,298).

In forex land we saw some big moves. The Swiss franc initially took a beating after the SNB unexpectedly cut rates, citing the massively overvalued currency. The target on 3-month libor is now effectively 0 from 0.25 per cent. Big moves were also seen on sterling – up 142 pips to 1.6425 after the jump in the services PMI, and the euro, up 127 pips to 1.4320. The Australian dollar for its part rose 19 pips to 1.0756.

Treasuries then sold off a bit with the 2-year yield up to 0.33 per cent, the 5-year rose 4bps to 1.26 per cent and the 10-year yield rose to 2.62 per cent (up 1bp). Aussie futures sold off 6 ticks on the 3s (95.91) and 5 ticks on the 10s (95.32).

Bits and pieces otherwise. The ADP employment report showed jobs rising 114,000 in July which was marginally higher than expectations (100,000). Then US mortgage applications rose 7.1 per cent in the week to July 29 (refis and purchases both up). In Europe, retail sales rose 0.9 per cent in June after a 1.1 per cent fall in the month prior. By the by, there are plenty of headlines out stating that Aussie retailing is the weakest in 50 years – weaker than any recession we've had. The only thing this suggests to me, with generally solid retail sales being reported by actual companies, is how flawed the ABS monthly retail survey actually is. They should fix it up or scrap it.

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

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