Scoreboard: Slow drive

Strong manufacturing data, including from car makers, failed to boost Wall Street in the lead-up to US payrolls.

Not sure that those great gains we saw on the Aussie market yesterday are going to be repeated today, unfortunately. Indeed, modest falls were seen overnight as US citizens prepared for the July 4 celebration and the market braced for the US payrolls on Friday.

The news flow itself was quite good and in particular we saw strong gains in US factory orders. These rose 2.1 per cent in May after a 1.3 per cent gain in April. Core business investment – which excludes volatile items like aircraft – rose 1.5 per cent , a great gain confirming acceleration in US growth.

Similarly, car makers are reporting very strong sales growth in the US. General Motors reckons that June might be the strongest selling month since November 2007. But they’re not the only ones reporting strong growth – Ford and Nissan said sales were up around 13 per cent a piece! It’s all looking good, which of course is bad for the QE taper.

The session started off well enough I guess, and at the high the S&P500 was 0.6 per cent higher. The offer soon came on though and at the close the major US indices were too far away from zero, with the S&P500 and Nasdaq effectively flat (-0.05 per cent and -0.03 per cent to 1614 and 3443 respectively) although the Dow underperformed, falling 42 points (14,932). Energy stocks outperformed, barely, lifted by a 1.6 per cent gain in crude or WTI, which was up on technical factors (closing the gap with Brent).

In price action elsewhere, US Treasuries bounced around. Well, the 10-year did, but ended little changed at 2.47 per cent. In forex, the Australian dollar is a bit lower form yesterday afternoon – maybe 20 pips to 0.9147. The euro is around 80 pips lower at 1.2978 and the yen sits smack bang on target at 100.63, up from 99.84.

Bits and piece otherwise – US regulators are set to publish a proposal next week that would force the eight largest US banks to hold more capital and apply stricter standards than have been set by Basel III (which was approved in a vote overnight).

As for the Reserve Bank Australia, I wrote my thoughts down in a piece yesterday which you can read here. To be honest, and on a superficial level, the statement reads as if the central bank would hold rates steady for a bit while assessing rate cuts to date, and if we were in a normal cycle that would be my call. I mean, taking the statement at face value, the fact is the Reserve Bank isn’t going to know over the next month whether rates have gained traction and the economy has rebalanced. They aren’t going to learn anything new, any view changing from data over the next month – not even from the inflation figures. So to have held yesterday, only to cut in August as if there were some critical piece of information coming out over the next month, is a little disingenuous. However, the truth is we’re not in a normal cycle – far from it, and policy is being complicated by this push for a lower dollar.

The problem is that we don’t know what exchange rate level policy makers are targeting. Most likely this will be based on some arbitrary assessment from industry groups who are demanding action on this front. However it will take some time for currency to help the earnings of those groups and lift them to a level that will satisfy. For everyone else, all we know is that rates are going lower, and that is the consensus expectation. When that will stop we don’t know.

The irony is that the RBA’s rate cuts are acting against a rebalancing. How? Because rates are already at a record low. So why aren’t they working? Because for non-mining investment, consumer spending and housing, confidence is the critical – and missing – ingredient. Every time the central bank cuts, confidence gets smashed. In contrast the bank’s decision to hold yesterday, we saw the All Ords spike another 0.6 per cent! That’s quite telling.

For today, the SPI suggests our market will fall 0.5 per cent and there is a bit of data of interest to boot. At 1130 AEST we see retail sales and the monthly trade data for Australia, which is followed closely by a China services PMI at 1145 AEST. At around 1250 AEST Reserve Bank governor Glenn Stevens gives a speech in Brisbane. Tonight the key focus will be US data, in particular initial jobless claims, the ADP employment report and the non-manufacturing ISM.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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