SCOREBOARD: Shop lift

Wall Street saw a small rise following strong retail figures, while European stocks were mixed on soft data.

US consumer spending is simply pumping at the moment. In February it surged 1.1 per cent, which was more than double the expectation, after a 0.2 per cent lift in December. A great result – but it didn’t really add much to stocks. Fair enough, I guess, as with markets at or pushing new records you need something other than what we already know.

Anyway, as I write, the key US indices are bouncing around zero (S&P, Dow and Nasdaq around 0.1 per cent to 0.2 per cent), having done the same thing in Europe (Dax up 0.1 per cent, CaC down 0.1 per cent and FTSE off 0.5 per cent). In Europe though the data was softer – eurozone industrial production fell 0.4 per cent in January, although this follows strong output, up 0.9 per cent, in December.

Similarly, the Italian Treasury auctioned off some debt and while demand was okay, it was weaker and yields were higher, so they sold €3.3 billion of a 3-year and 15-year bond, the 3-year going out at a yield of 20.48 per cent from 2.3 per cent in December and the 15-year bond at 4.9 per cent from 4.8 per cent in January. In the secondary market, the Italian 10-year rose to 4.66 per cent from 4.56 per cent, before settling back down to 4.61 per cent. The Spanish equivalent was up a few basis points to 4.76 per cent.

So we’re in a bit of lull really, nothing much exciting and as yet no bargain on the US deficit. All we’re getting is more flatulence – this time Obama said, in a meeting with Republicans, that he doesn’t want to balance the budget in 10 years, he wants to lift taxes and increase spending.

There wasn’t much action on commodities either – crude was down 0.2 per cent ($92.38), copper off 0.7 per cent and gold down smalls ($1588).

In the forex space, the Australian dollar was little changed at 1.0310, having hit a low of 1.0282. The euro was 45 pips lower at 1.2960, the British pound was little changed at 1.4926 and yen was at 96.05.

Finally on the rates side, US Treasury yields initially shot up about 5 bps on the 10-year to 2.05 per cent, after those retail sales figures. They’ve subsequently eased off some, and at the time of writing, the 10-year was only about 2 bps higher from 1630 at 2.02 per cent. The 5-year is at 0.88 per cent and the 2-year 0.26 per cent.

Turning to yesterday's data, the rise in consumer confidence was obviously great – up 2 per cent following a 4 per cent fall when the Reserve Bank cut rates, and up 10 per cent for the year so far. This reflects the fact that none of the pessimistic calls of last year actually eventuated; plus, the rally in Aussie shares and the fact the Reserve Bank has held rates steady so far this year. All good outcomes.

The fact that the Reserve Bank has stopped panicking has been a great development as the decision to cut rates has clearly weighed on consumer and business confidence. As I’ve highlighted before, cutting rates when the domestic news flow is actually good – above-trend GDP, low unemployment etc. – makes it very difficult for people to accept that things are okay. "Why else would the Reserve Bank be slashing rates?" people ask.

That said, confidence has only just returned to levels that we saw prior to the rate cuts. And this was at a time when the US was definitely going to double dip and Greece was definitely (90 per cent chance, according to Citi) going to leave the eurozone. It was not a case of if, but when.

So the recent spike in confidence is a good thing, but it’s really a recovery from the confidence-destroying economic commentary we saw last year and in 2011. In December 2010, expectations were that the Reserve Bank was going to hike rates, not cut them – and yet confidence was higher.

Some economists argue that that confidence will lift further because consumers are reacting with a lag to low interest rates. That’s a fairly disrespectful argument though, because it implies that consumers are stupid and don’t realise rates have been cut – even one year later! Then apparently they wake up one day and say "Whoops – rates are lower, wow, our puny brains have only just managed to process this fact".

Economic activity, lending and so on act with a lag, sure. But the data shows that confidence doesn’t. So any idea that confidence is only just catching up with lower rates more than a year later is a completely ridiculous thing to say (that’s economists for you, though!). Fact i,  there are diminishing returns to cutting rates from an already low rate, and at the start of this easing cycle, rates at 4.75 per cent were already historically very low.

So looking at the day ahead, the SPI points to a flat outcome today on Aussie stocks. As for macro data, it’s all about employment today for the land of Oz. The consensus is that 10,000 jobs were created, but that the unemployment rate rose to 5.5 per cent.

Tonight we get eurozone employment stats and, for the US, producer prices and the current account.

Have a great day…

Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.

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