SCOREBOARD: Slow and steady

Small moves on Wall Street followed another round of positive data, as the US economy continued to advance.

Moves were small and mixed across Wall Street overnight – well, that’s with an hour left to trade – with little in the way of market-moving data. That said, the data that the US did see was positive, as it has been for some time, and it continues to paint a picture of a robust economy that is accelerating. So US retail sales rose by 0.1 per cent in January, which was as expected, and is a great result following a strong 0.5 per cent gain the month prior.

Core sales, less auto and gas, rose 0.2 per cent after a 0.7 per cent rise. Complementing that, business sales rose 0.3 per cent in December with inventories up 0.1 per cent. All good. So then the Dow is down almost 62 points (13,957) so far, the S&P is off 0.2 per cent (1516) while the Nasdaq is 0.2 per cent higher (3192). By sector, telcos, utilities and financials look to be the key underperformers at this stage, with industrials outperforming.

There wasn’t too much to say about commodities – they were all weaker, though it’s not on any dour global view. So gold was off about $7 to $1642, copper fell 0.2 per cent, while crude was 0.5 per cent lower to $97.01. Similarly, there was virtually no action in the forex space – the Australian dollar was unchanged at 1.0345; ditto with the euro at 1.3445; and even the Japanese yen hasn’t done much at 93.44.

The mood across the pond was a touch more optimistic and stocks generally rose – the Dax was up 0.7 per cent, the CaC 0.3 per cent higher and the FTSE100 0.4 per cent higher. The outperformance can perhaps be put down to the larger than expected increase in euro zone industrial production, which was up 0.7 per cent in December (more than the 0.2 per cent expected) following a 0.7 per cent fall the month prior. That and perhaps a reasonably successful Italian bond auction. They sold €6.6 billion worth of bonds, and while the yield on the 3-year was up to 2.3 per cent from 1.8 per cent in January, yields on longer dated bonds eased. So the March 2026 bond went out at 4.55 per cent from 4.75 per cent. In any case, these are all low yields and the auction again highlighted that Italy is having no trouble raising cash.

Finally for the piece action, the US 10-year Treasury yield rose 5 bps to 2.02 per cent after an only mediocre demand at one of the Treasury’s many bond auctions. If that keeps up, the Fed is going to have to ramp up the presses! The 5-year is then up 4 bps to 0.9 per cent, while the 2-year is at 0.27 per cent. Aussie futures look to have followed suit, with the 3s and the 10s down about 5 ticks or so a piece to 97.11 and 96.465 respectively.

Otherwise, note that in Switzerland the government accepted a proposal from its central bank to force commercial banks to hold a counter-cyclical capital buffer by holding extra capital – 1-2.5 per cent of risk weighted assets. The idea is to slow bank lending down as rates are held at record lows.

As for that 7 per cent surge in consumer confidence that we saw yesterday (February figures), well, what can I say? A great result. We’ve see a solid rebound in confidence over recent months, driven mainly by the fact that all the alarm and fear through 2012 came to nothing. There was no ‘Grexit’; iron ore prices had rebounded; shares were surging from the middle of last year; the fiscal cliff fizzled etc. That the Reserve Bank cut through all of these episodes only served to reinforce these fears and give credence to them, and they exacerbated the sense of alarm, which in turn hit confidence. Interest rates at 4.5 per cent or 4.75 per cent were very low after all. Naturally enough it raises eyebrows when policy makers adopt panic measures. It’s natural then for citizens to breath a sigh of relief when rates (already at very low levels) are held steady – it’s taken as a signal that policy makers feel a little more comfortable with things. The Reserve Bank should show some leadership and cease panicking and alarming people.

There is a view that the rebound reflects the lagged impact of rate cuts, but I find this view lacking in any merit. Confidence actually declined on a contemporaneous and lagged basis after the Reserve Bank cut. Moreover, it’s a little condescending to say that consumers are so stupid that it takes them over 12 months to realise that rates are lower. I, on the other hand, don’t think that consumers are stupid (can’t say the same for policy makers, other leaders and many economists). I think they can read and I think they do realise that rates are lower. But when they read the pessimistic drivel that is used to justify rate cuts (none of which ever eventuated), they don’t feel optimistic about things. It’s common sense stuff.

The SPI is so far virtually unchanged (4955) so it should be a quiet one today. The calendar shows there isn’t any tier 1 data for Australia and the main release this morning will be Japanese fourth quarter GDP. Tonight we see eurozone GDP, US initial jobless claims and a speech from St Louis Fed President James Bullard.

Have a great day…

Adam Carr is a leading market economist.

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