Scoreboard: Shut down, start up

Stocks struggled to find a bid, but key economic indicators bucked the government shutdown to keep stubbornly accelerating.

A better-than-expected result on the non-manufacturing ISM index didn’t quite have the result that you’d expect in these times of woe. At the same time the Federal Reserve is telling anyone who’ll listen that the recovery may not be on sustainable footing – in the real world – economic indicators are accelerating. The services index was actually expected to fall to 54 from 54.4, but instead rose to 55.4.

What was especially good about this result, was that the business activity index was almost 5 points higher at 59.7, while the employment index was up 3.5 points at 56.2. Both are clearly at a much faster pace of growth. That’s the ISM manufacturing index and the non-manufacturing index accelerating, despite the government shutdown. This is great news. Maybe it’s the case that markets are awaiting the payrolls figures this Friday.

Yet stocks could barely find a bid, spending most of the session thus far below 0, albeit just with a fall of 0.1 per cent on the S&P500 with an hour left to trade (1765). The Dow for its part was up 18 points to 15,644 and the Nasdaq was flat (3937). It’s a similar situation on the commodities front with gold down just under $5 ($1309), while crude was off 1.2 per cent at the time of writing to $93.5 (WTI). This is the lowest price for WTI since late June. Brent was down 0.7 per cent to $105.4 which is also about a five month low. This saw energy stocks as a key underperformer for the session, although telecommunications had a poor session as well.

Elsewhere, bond markets had a more pronounced response to the stronger data, the 10 year Treasury yield up about 6 bps to 2.66 per cent. Then in the FX space, euro is off about 25 pips, yen is at 98.58 from 98.45. Finally, the Australian dollar is at 0.9492 recovering most (about 30 pips) of its losses after the RBA’s statement yesterday. In fact it’s now barely changed from just before the decision.

As to the RBA’s decision, it was obviously widely expected as was the statement, which saw the RBA pulling out both hands – making things as vague as possible. On the one hand they’re seeing signs of a rebalancing (though things are uncertain here), but on the other they reckon the exchange rate is still “uncomfortably high” and they were more emphatic about that this time and the need for it to be lower. Their intentions are ambiguous in other words and that’s exactly how I think they want it. It’s what the Federal Reserve is doing as well.

Looking forward, only eight economists expect a rate cut next year and markets are basically pricing in a hike from late next year. Could they still cut? Yes absolutely, this board has shown a complete disregard for the rest of the economy in its dangerous, and misguided, pursuit of an exchange rate target – it is dangerous times for policy. Yet wiser heads are prevailing at the moment. On the economics of it, a rate cut shouldn’t even be considered and of course my own view is that rates are far too low. Yet policy makers here and abroad don’t have a great track record when it comes to interest rate settings – overshooting or undershooting with quite serious negative consequences.

For today, the SPI suggests our market will be flat and there’s not really a lot else out that’s exciting. We get the domestic trade balance today at 1130 AEDT of course but that’s it. Tonight, the key data includes German factory orders, and retail sales for the eurozone. In the UK, industrial production is worth keeping an eye on, while for the US we only see a few minor indicators like the leading indicators, mortgage applications and a speech from the Federal Reserve’s Sandra Pianalto.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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