SCOREBOARD: Spanish sting

Markets softened after Spain announced a return to recession, which was really no surprise at all.

The news flow wasn’t all that bad overnight. Spain is back in a recession, but then I don’t think that’s really a surprise is it? In fact it wasn’t, as forecasts were for growth to contract 0.4 per cent and it did basically, falling 0.3 per cent. That Spanish bond yields continued to fall overnight was a good sign that bond investors weren’t spooked about what impact this would have on Spain’s capacity to pay – the 10-year yield down 11 basis points to 5.76 per cent, while Italian yields fell 13 basis points to 5.51 per cent. Even the euro wasn’t that fussed, down only 28 pips or so from 1630 to 1.3239.

It was in the equity space that the offer was put on and the major European indices were down 0.6 per cent on the Dax, 1.6 per cent on the CaC and 0.7 per cent on the FTSE. Across the sea on Wall Street, it was a similar story although magnitudes were better. The S&P500 was pretty much offered from the open, spent much of the session bouncing around not doing much, before a late rally developed into the close. At that point the S&P was down 0.4 per cent (1397) with tech, industrials and financials weighing most heavy, although telecoms, energy and utilities rose. It’s interesting to note that gains in energy stocks occurred even with a fall in crude – WTI was down 0.1 per cent ($104.8), Brent down 0.5 per cent to $119.2.

As to the dataflow out of the US, it was, by and large, good. Well, I mean the Chicago PMI fell to 56 from 62, but then again the Milwaukee equivalent rose and these are minor indicators anyway. The more important data for the session came from personal income and spending – both were up at a solid clip in March. For the specifics, income rose 0.4 per cent after a 0.3 per cent rise, while spending rose 0.3 per cent after a 0.9 per cent gain. This is strong spending, which we are also seeing the monthly retail survey and of course we know that consumers made a sizeable contribution to first quarter GDP. In fact private demand is growing strongly, the main negative contribution coming from government. In any case, this data didn’t seem to have any discernible impact on stocks. The Dow for its part fell 0.1 per cent (13213), the Nasdaq was off 0.7 per cent (3046) and the Aussie SPI was 0.1 per cent lower (4393).

Elsewhere price action wasn’t all that exciting. We saw the Australian fall about 30 pips to 1.0430, Sterling was close to 50 pips lower (1.6234) while yen sits at 79.82 from 80.16. Then in the treasuries space, they did little. The 10-year yield was down 3 basis points to 1.91 per cent, the 5-year fell 2 basis points to 0.809 per cent, while the 2-year was little changed at 0.257 per cent.

So then, in terms of other data out, we saw US inflation in March, as measured by the PCE deflator rise 0.2 per cent in terms of headline and core. Annually, headline is a little lower at 2.1 per cent from 2.3 per cent while core rose to 2 per cent from 1.9 per cent. Inflation is above the fed’s comfort zone and is accelerating. Consistent with their dual mandate they should hike rates. They won’t of course. In Europe, inflation remains well above target and was little changed in April rising 2.6 per cent year-on-year compared to 2.7 per cent year-on-year in the month prior. Outside of that German retail sales rose by 0.8 per cent in March to be 2.3 per cent higher annually. That’s it.

Looking at the day ahead we get the RBA rates decision today at 1430 AEST and they are expected to cut between 25-50 basis points. A total 27 of 29 economists look for a 25 basis point cut to 4 per cent, the other 2 look for 50 basis point cut to 3.75 per cent. At its low during the GFC, the cash rate was 3 per cent. People were screeching for 2 per cent. Before that, the lowest cash rate was 4.25 per cent (since inflation targeting). That’s where we are now actually, so is it reasonable for anyone to suggest that cash rate has been too high? I doubt that. That’s just lazy.

Prior to that and at 1100 AEST we see China’s manufacturing PMI and then in the afternoon, we get the RBA’s commodity price series at 1630 AEST. For the US, we get the ISM index out tonight and the market expects a very small fall to 53 in April from 53.4.

Don’t forget the annual May Day strikes held in Greece. They kick off every year but with the election this weekend they may take on a little more significance. As to that election, latest polling suggests PASOK and New Democracy should be able to form some type of coalition, which sure beats some the less, umm, reasonable alternatives. If that happens then legislation regarding bailouts and deals etc should be passed.

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

Related Articles