SCOREBOARD: Spanish ambition

Markets abruptly turned buoyant overnight following Spain's decision to embrace austerity in its latest budget.

Following a week of rising pessimism sentiment took an abrupt turn overnight, sparked largely by Spain’s announcement to cut an additional €13 billion from its 2013 budget (total announced now €40 billion or 0.8 per cent of GDP). This is all in an effort to bring the budget deficit down to 4.5 per cent of GDP from its current 6 per cent or so now (9 per cent last year).

One of the key reasons this has soothed nerves, apart from the simple virtue of having sound public accounts, is that it could be a move toward a formal bailout. Somehow this has become essential in order to calm market nerves. And it has a bit. So the Spanish 10-year yield fell about 10 bps to 5.89 per cent and Italy’s 10-year was off about 9 bps.

A reasonable auction of 5 and 10-year bonds probably helped as well. The Italian Treasury sold €5.6 billion in 5 and 10-year bonds with the 5-year going out at 4.09 per cent from 4.73 per cent in late August. The 10-year went out at 5.24 per cent compared to 5.82 per cent last month.

Stocks pushed higher then, if just modesty, and in Europe, the Dax was 0.2 per cent higher, the CaC rose 0.7 per cent while the FTSE was also 0.2 per cent higher.

Wall Street had a much better session of it, the S&P500 rising almost 1 per cent (1447), the Dow up 0.5 per cent (13485), while the Nasdaq rose 1.4 per cent (3136). The magnitude of some of these moves, the comparative outperformance may surprise you when you see all the headlines about durable goods order slumping 13 per cent – in August alone.

Fact is though a lot of it was aircraft or transport goods more generally. Orders associated with less volatile investment actually rose 1.1 per cent. Similarly second quarter GDP was revised down to 1.3 per cent from 1.7 per cent as farm inventories and consumer spending were both weaker than initially estimated.

Annually, growth is 2.1 per cent higher than a year ago, down from 2.4 per cent in the first quarter. Overall growth is running a little below trend in the second quarter, which under the circumstances isn’t bad.

Certainly this has been one of the stronger recoveries compared to previous episodes, which of course is why the jobs recovery is strong (for more details as to why this is the case, and why statements that the recovery is weak are simply wrong, see my Eureka Report column).

And indeed it was data on the jobs front that helped push Wall Street just that little bit higher than the European bourses. You see jobless claims dropped sharply in the week to September 22, down to 359,000 from 385,000. This is the lowest level since July and consistent with ongoing robust employment growth.

This more positive economic data and the news flow on Spain helped spark a bid across the commodity spectrum, especially crude which has taken a belting lately. So WTI was up 2.6 per cent ($92.32), copper was up 0.9 per cent and gold shot $26 higher to $1780 – this is the highest level in about six months.

Reflecting this more positive sentiment, US dollar was weaker and we saw the euro up about 30 pips to 1.2915, while the Australian dollar was 40 pips or so higher to 1.0443.

On the rate side there was almost no action, US Treasuries travelled in a pretty tight range (3 bps) and ended about 2 bps higher on the 10-year at 1.647 per cent. The 5-year sits at 0.64 per cent. While the 2-year is at 0.25 per cent. Australian debt futures for their part fell 3 or 4 ticks to 97.61 and 97.055 respectively.

Bits and pieces otherwise, Germany ratified the permanent bailout fund and we saw the European business climate indicators dip a bit in September to -1.3 from -1.2 which isn’t too bad considering the average is 0 and the maximum is 1.4.

Other than that, UK GDP was revised up a bit to -0.4 per cent in the second quarter from -0.5 per cent, Italian business confidence rose to 88.3 in September from 87.3 and the German unemployment rate was steady at a low 6.8 per cent. Finally, German import prices shot up 1.35 in August to be 3.2 per cent higher annually.

Looking at the calendar today, we get private sector credit for Australia at 1130 AEST and then at lunch time (1230 AEST) a private sector estimate of the Chinese manufacturing PMI.

This afternoon its worth watching German retail sales, and we get another update on eurozone CPI. Currently above trend at 2.4 per cent – during an effective recession. Tonight , the major US data is personal income and spending and the final estimate of consumer confidence by the Michigan Uni (September).

That’s about the lot, have a great day and a great weekend…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

@AdamCarrEcon on Twitter.

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