It was another savage session for precious metals last night. Gold slumped a further $33 to $1391 and silver fell 3.75 per cent, with some news wires attributing the fall to lower producer price inflation in the US (which fell 0.7 per cent in April).
I think this confuses causality though, as headline inflation results are coming down because of the rout in some commodity prices (headline annual producer prices are 0.6 per cent higher annually while core rate are up 1.7 per cent) and the fact that commodities more broadly, and bizarrely, are not sharing in the equity rally. Something will give.
In support of both is the acceleration in global growth. US and Chinese data has been robust and last night we saw eurozone GDP. Now, it wasn’t great, showing the sixth consecutive quarter of decline and a fall that was slightly larger than expected at 0.2 per cent versus a 0.1 per cent prediction.
Nevertheless, this follows a fall of 0.6 per cent the previous quarter. The rate of decline is slowing. German GDP itself is growing, and it rose 0.1 per cent in the quarter.
Over in the UK, the unemployment rate fell to 7.8 per cent from 7.9 per cent and the Bank of England even revised up its growth outlook. Small mercies, sure, but the fact is recessions don’t last forever, especially recessions – in the case of Europe – which were induced by a collapse in confidence. I guess the fall in US industrial production didn’t help the sentiment in commodities either, production falling 0.5 per cent in April. Again though, this follows decent gain the two months prior.
Moreover, while copper may have slipped 0.6 per cent, crude was up smalls – 0.2 per cent to $94.4. Importantly, equities also pushed higher – and that’s against all the headlines suggesting a deteriorating global growth outlook and the discussion about whether QE will be pulled in. Equities are saying 'Pah!' to both, and that’s the right track. Global growth is getting better and we know QE won’t end anytime soon. The bizarre price action in contrast is commodities failing to get any traction for this improved outlook. In any case, consumer and financials are key outperformers across the equities space and even basic materials put in a solid performance.
For the remaining price action, the Australian dollar held below 0.99 at 0.9895, which is little changed from yesterday afternoon. The euro, at 1.2884, is only marginally lower and the British pound is up about 30 pips to 1.5231. The yen sits at 102.24.
There wasn’t too much that was exciting on the Treasuries front either. The 10-year yield is down a couple of basis points to 1.939 per cent, the 5-year is at 0.83 per cent and the 2-year at 0.237 per cent.
Bits and pieces otherwise, Fitch upgraded Greece’s credit rating to B- from CCC, which saw a huge rally in Greek bonds. Then in the US, the Congressional Budget Office reckons the US budget deficit will now be about $US642 billion in the year to September 30, down from their previous expectations for $US845 billion three months ago and $US1.087 trillion last year. Meanwhile the NAHB housing market index rose to 44 in May from 41.
To the day ahead, our SPI suggests Aussie stocks will have a quiet session today, with that index up only 7 points (5208). As for news and data there is only a little by the looks of it. We get March quarter Japanese GDP this morning while tonight we see updates of eurozone and US inflation. Weakening commodity prices have seen inflation slow, but we’ve seen this before as temporary distortions in commodity markets weigh on headline inflation results.
In addition to that we see jobless claims, housing starts and the Philly Fed index.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.