SCOREBOARD: Steady as she goes

Another night of respite, kindly provided by the absence of any major negative news flow out of Europe and indeed some positive economic data out of the US. The non-manufacturing ISM was out last night, just beating expectations for a fall to 53.4, instead rising modestly to 53.7 from 53.5. The commentary provided by business leaders was mixed but generally positive. Comments like "business is strong” or "Q2 will be strong” were to be found amidst comments such as "while we remain optimistic about the economy our numbers do not show a surge in activity”.

Compare this to what some of our business people have said: "the whole eastern sea-board is in a recession”. It's certainly not the cream floating to the top, that's for sure. But, US stocks managed to find a bid after that data and while they bounced around (down 0.3 per cent at the low) managed to close 0.6 per cent higher on the S&P (1285), 0.2 per cent on the Dow (12127) and 0.7 per cent on the Nasdaq (2788). By sector, financials, tech and energy stocks were the key outperformers, although all sectors outside of telecommunications were higher. As for Aussie stocks today? They look like they might have a fairly subdued session, the SPI is only up 0.2 per cent (4060) and S&P futures.
Over in Europe, the only real news-flow came from the G7 and Spain. The G7 pledged to cooperate in dealing with Europe's problems and no doubt discussed ‘the master plan' that will be unveiled later this month, although the idea of it being a master plan is being played down. The Spanish for their part want European institutions to be able to lend directly to banks to recapitalise them. The Spanish foreign minister said overnight that the amounts needed for recapitalisation weren't excessive (estimates are as high as €100 billion) and so should present no problem, but panicky and irrational markets made it difficult to raise the cash. Stocks were mixed with the Dax off 0.2 per cent, the FTSE off 1.1 per cent but the CaC up 1.1 per cent. Spanish 10-year bond yields eased further, falling 11 basis points to 6.3 per cent, while the Italian 10-year was 2 basis points lower at 5.64 per cent.

Otherwise things were boring on the debt side. US treasuries sold off a little, and the yield on the 2-year rose 2 basis points for the session to 1.578 per cent. The 5-year yield was unchanged at 0.68 per cent and the 2-year at 0.25 per cent. Aussie futures were 2-3 ticks higher – the 3s at 97.83 and the 10s at 97.14.

As for forex and commodity markets – the Australian dollar is down about 40 pips (from 1630) to 0.9743, euro is lower, having dropped a big figure or more yesterday afternoon, but is little changed from 1630 at 1.2453. Yen is then at 78.76 and sterling at 1.5382, little changed as well (session low of 1.5322). Gold is then at $1672, little change, ditto crude with Brent at $98.6 and WTI at $84.03.

That's largely it for overnight stuff. Regarding the RBA's decision yesterday, the stand out feature to me was the lack of any real justification for a cut. The RBA board are clearly panicking and that's a very real concern for the country. The main rationale offered for a cut was the deterioration in financial market sentiment and concerns over Europe. Growth isn't actually lower anywhere or expected to be lower. The reference the RBA's statement made to growth in China being more modest, again, reflects anxiety more than any hard reality at this point. Similarly the reference to growth domestically being modest is a misnomer – domestic demand is above trend and we are at full-employment. Indeed most forecasters still expect global and domestic growth to accelerate this year. All that's really happened is that Greece had an election that the markets didn't like – panic ensued. We have also seen some softer indicators, which at this point may simply reflect the usual volatility in the data flow rather that any renewed slowdown or change in trend – e.g. softer US jobs growth, some PMIs. This has certainly been the pattern over recent years. Recall at this stage the frequent concerns over double dips, etc, that came to nothing. Indeed the fear always comes to nothing. We simply don't know the outcome of this episode of turmoil yet, but previous episodes strongly suggest the panic will subside and the data flow will pick-up. As has happened every single other time.

It confirms that the signposts I mentioned previously are correct though. Monetary policy is being run on emotion which is why rate cuts are not instilling any confidence. It doesn't do for a country to see its ‘leaders' panic as they are now and I have actually had people ask me how long this recession (Aussie recession) was likely to last. That means that subjective aspects like the feel of things or the news flow are the primary determinant of the cash rate – as was demonstrated yesterday. Consequently, the future path of policy is very much an open book at this stage, but no guidance will be offered by the economic data. Economists are busy recalibrating new lows for the cash rate and I think that's probably right after recent decisions by the board. As I've noted frequently, its politics not economics now – the RBA is going the way of the Fed and the BoE which I think is very sad. Is it likely that we will have further episodes of financial market turmoil? Yes, of course. Well then, more rate cuts are likely.

So looking at the day ahead then, we get Australian GDP at 1130 AEST where the market expects a 0.6 per cent rise. I think that's about right. Tonight we get US productivity and labour costs, the Fed's Beige book, eurozone GDP for the March quarter and German industrial production.


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

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