Scoreboard: Slowing down gracefully

Global markets posted solid gains despite IMF warnings on global growth and a downgrade on Italy's credit rating.

Earnings optimism, that the Fed still prints money, strong jobs growth – who knows what drove the gains last night. The absence of bad news? But gains they were, and good ones at that.

At the close, the S&P500 put on a further 0.7 per cent, which is the fourth consecutive gain – five days out of the last six trading sessions. All good news and last night’s gains were led by basic materials, energy and industrials, helped by a 0.9 per cent gain in crude ($104.02), although copper fell again (-1.1 per cent). The Dow was otherwise 75 points higher (15,300), while the Nasdaq rose 0.6 per cent (3504).

What’s odd about those price moves is that the International Monetary Fund came out last night, trumpets blaring, to declare that global growth would be slower hence. So there wasn’t really an absence of any bad news after all. Anyway, this slower growth is to be led by weaker growth in the emerging markets.

In particular there were some solid downgrades to Chinese growth – revised down to 7.8 per cent this year from a previous forecast of 8.1 per cent and 7.7 per cent in 2014 from 8.3 per cent. For the globe itself the IMF expects growth would now be 3.1 per cent in 2013 instead of 3.3 per cent and 3.8 per cent next year instead of 4.1 per cent. Maybe the reason why this didn’t spook markets is because the way the debate is going, those Chinese downgrades still leave the fund’s China forecasts above the consensus.

European markets proved to be immune to the IMF’s announcement and they weren’t too bothered by S&P’s decision to downgrade Italy to BBB from BBB with a negative outlook, stating that Italy’s economic prospects had deteriorated. Against that backdrop, the Dax still managed to put on 1.1 per cent, the CaC 0.5 per cent and the FTSE100 almost 1 per cent. How the times have changed – there was a time that such an announcement would have caused carnage, although it does follows a similar move by Fitch in March and Moody’s in April.

Also there was some commentary from European Central Bank board member Joerg Asmussen who said that the bank may keep rates low beyond the next 12 months and might even engage in other round of ultra-cheap loans to the market. The euro fell more than a big figure on that to 1.2782.

There wasn’t really much else in the way of news and data. UK industrial production was flat in May. Oh – and US small business optimism fell slightly in June, while the Department of Labor reports more job openings. Otherwise, for the price action, the Australian dollar is about 30 pips higher to 0.9177, while the yen is at 101.12, which is little changed.

To the day ahead, the SPI suggests our market will lift another 0.4 per cent. As for the data, my calendar has Chinese trade, money and loans data out some stage today. Then at 1030 AEST we see Westpac’s consumer confidence figures.

There will be some conflicting forces at play here. On the upside and supporting confidence, the Reserve Bank held rates steady this month, which has been taken as a signal that the board is less concerned, which in turn boosts confidence in the broader economy: “Phew,” people say, “maybe we aren’t going into the trough after all.”

Also, the leadership spill looks like it could boost confidence some if polls are any guide. However, perhaps offsetting that is the weaker dollar. While miners might like a lower Aussie dollar, as well as some manufacturers who export abroad, the 12 per cent fall does in fact make Australian consumers poorer – much worse off. And it’s not great for anyone who doesn’t export, as import costs are higher.

In part that’s probably why we saw National Australia Bank’s business conditions at their lowest in four years (or since May 2009). Confidence itself was barely changed at a very low level, although we should be thankful it rose following the Reserve Bank’s decision to keep rates on hold. The pattern as we know has been for confidence to deteriorate following a decision to cut. As for conditions, the fall occurred despite the Reserve Bank’s 200 bps worth of cuts and the weaker dollar really doesn’t help the majority.

Tonight we get German inflation, US wholesale sales and the Federal Reserve’s minutes.

Fed Chairman Ben Bernanke also gives a speech on policy.

Enjoy…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.