Investors put the smack-down on increasingly irrational concerns about the solvency of Spain last night. About €3 billion in bills were auctioned off and while the government is paying more – so for instance, on the 12 month bills they paid 2.63 per cent compared to 1.4 per cent last month – investor demand was solid and more was auctioned off than initially planned (over €1 billion more). A bond auction is planned for this Thursday so we'll get a better idea then, but it calmed the market for last night at least and further along the curve, the bid was solid. The Spanish 10-year bond yield then fell 18 basis points to 5.88 per cent – the Italian 10-year was off 12 basis points to 5.48 per cent.
Naturally enough this gave a fairly significant sentiment boost to the broader market and we saw European equities surge overnight – with the Dax and CaC up some 2.7 per cent, while the FTSE was up 1.8 per cent. Spain wasn’t the only cause of joy though. There were a few others and it all had to do with growth. Following on from strong US retail sales growth, the German ZEW survey showed investor sentiment improved in April, the current situation index rising to about 40 from 37 (the average is -16). Economic sentiment also improved to 23 from 22 (average is 17). You can see why the IMF is becoming more optimistic on growth prospects and they upgraded their forecasts slightly last night – now expect global growth of 3.5 per cent this year and 4.1 per cent next (up 0.1 and 0.2 per cent respectively). Solid.
Following Europe’s lead, Wall Street had a strong session as well, the S&P index closing 1.6 per cent higher (1390) on broad-based gains, with tech, energy and basic materials the key outperformers although commodities themselves weren’t that spectacular. So gold was little changed at $1649, copper rose 0.4 per cent and crude was mixed – WTI up 1.45 to $104, while Brent was basically flat (down a bit to $118). Elsewhere, the Dow rose 1.5 per cent (13115), the Nasdaq was 1.8 per cent higher (3042) and our own SPI rose 1.1 per cent to 4338.
US bonds then sold off a bit but not much – not much at all actually and at the close, the 10-year yield was just 2 basis points higher at 1.99 per cent, the 5-year was 2 basis points higher at 0.86 per cent and the 2-year was little changed at 0.27 per cent. Aussie Futures were off 6 and 5 ticks respectively to 97.78 and 96.21 on the 3s and 10s.
Finally for the price action, Australian dollar has shot up almost a cent to 1.0391, briefly cracking through 1.04, while the euro is about 25 pips higher at 1.3126. Sterling is about 50 pips higher at 1.5922, while yen sits at 80.87 – little changed.
One of the more ominous but completely ignored (except by yours truly) pieces of data out last night concerned inflation. The BoE has repeatedly argued, forecast, whatever, that inflation would moderate sharply and as yet that hasn’t happened. In fact the opposite has happened and data out last night showed inflation accelerated to 3.5 per cent year-on-year in March from 3.4 per cent. The 10-year gilt was only up 6 basis points to 2.097 per cent in response. So after inflation you get no return from holding gilts, or treasuries. Keep the fear alive! The eurozone also released inflation data and, again, inflation isn’t moderating and remains stubbornly above target at 2.7 per cent. Keep this in mind as you read my comments on the RBA below. As I’ve been warning for years now, inflation would come, it is indeed here and central banks are pretending it isn’t occurring. We’re not talking hyperinflation, but bear in mind that we are starting this recovery with inflation well above target. As the economy expands what do you think will happen, noting that central banks are pretending there is no inflation and in fact some suggest that deflation is a threat. Up is down. Two plus two is five.
Other data we saw from the US wasn’t that crash hot – housing starts for instance fell 5.8 per cent in March to 654,000 (average is 1.3 million) but we know housing is weak and industrial production was flat in that same month – following the strongest growth in 30 years.
Now, before I sign off, I’ve got a few quick – OK not so quick – words on those RBA minutes we saw yesterday. As indicated in the press release following the rate decision, the board has indeed moved the goal posts and much more clearly in these minutes we saw yesterday. The prior statement that 'demand' would need to materially weaken if we were to see more cuts, is no longer a requirement and the board’s new focus is output, which of course is much weaker than demand – the bar was lowered.
Now this is actually quite a critical change and the fact they have moved the posts suggests to me that all is not as it should be. In my opinion, it’s quite clear that narrow sectional interests have corrupted the decision making process. Note that the board actually points out in the minutes that demand is at its strongest in four years, although they place this at the feet of mining investment, which of course is wrong. Household consumption has provided half of the growth in private demand, which is about consistent with its weight. No mention of that was made. Non-mining investment has also been strong, although again, no mention of that was made. Instead, the board chose to perpetuate the myth that outside mining the economy was weak, struggling under the weight of a strong dollar – not directly of course. But the point is this is simply untrue.
The board then demonstrate in the minutes that they have completely failed to understand or comprehend why output is weaker than demand. I have explained that it is largely because of the floods and very strong import growth. This is a mathematical fact – it isn’t subjective and so there is no room for error or misunderstanding. Yet the minutes made no mention of very strong import growth – the huge detraction to growth that net exports have consequently made. The board and this surprises me, also made no mention of the fact that manufacturing growth has been very strong. It is important for the board to recognise the reason why output is weaker than demand, very important. Because on even a rudimentary understanding of how policy works, it is quite clear that lowering rates will not address the factors that dampened output growth last year – the floods and imports. A first year student should know this. As if to hammer home the point that the RBA board doesn’t have a clue as to what is going on and is misreading the economy, employment surged in March, taking the annual gain to date to 75,000. Oh, and hours worked increased and participation rose. All in contrast to the board’s comments on the labour market in the minutes yesterday – the polar opposite. Car sales were also strong, but they have been for a while.
The way I see it then, the board want to cut rates – to prop up an unpopular government and prop up lazy business people – they are now just looking to justify it which is why they moved the goal posts. This all suggests to me that the bar for another cut is very low – or rather the bar for a rates on hold decision is very high. My expectation at this stage is that only a 0.8 per cent or above on the cores will see the RBA hold steady.
OK, that’s it then. For the day ahead there isn’t a great deal. We see the BoE’s minutes, UK unemployment data and European construction data – which I think is all the major stuff. Not a lot from the US – weekly mortgage applications.
Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.
Follow @AdamCarrEcon on Twitter.
SCOREBOARD: Spain gain
Confusion about the state of Spain's financial affairs was reflected in the bond market, and saw boosts in the broader markets.
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