SCOREBOARD: Stimulus suspense

European brinkmanship continued as the ECB dithered, while Wall Street was jumpy ahead of Ben Bernanke's Jackson Hole speech.

Most of the press suggests that last night’s market moves were driven by Spain’s decision to delay a request for a bailout. It’s a strange situation isn’t it. Spain is being forced into a bailout they wouldn’t need in a rational market, but they are delaying until they see the quid pro quo. Which is fair.

I suspect the underlying implication is that the ECB may not be as close to buying Spanish and Italian bonds as the market thinks. They are dithering, as it were. Consequently French President Hollande, in a joint press conference with the Spanish prime minister, felt compelled to prod the ECB, stating: "when interest rate spreads are so large without economic justification that can be a justification for an intervention in the name of the objectives of monetary policy.” The Spanish prime minster complemented that, stating: "the fact that some countries are financing themselves at 0 per cent and some at 6 per cent means that something doesn’t work in monetary policy.” And so the brinkmanship continues.

I guess it makes sense then – sort of. Any sniff of a chance that the major central banks may not print to infinity and beyond is bad, right? Paradoxically? Not for the Italian Treasury last night, when they sold over €7 billion in bonds and at lower yields. The 10-year for instance went out at a yield of 5.82 per cent, which is down about 14bps from last month, with the bid to cover stronger at 1.4 v 1.29 last time. In any case it was bad news for European stocks and they still took a tumble, the Dax especially so, falling 1.6 per cent. The CaC was then off 1 per cent and the FSTE 0.4 per cent. Euro then dropped about 70 pips and sits at 1.2506.

Across the Atlantic, US equities followed the same lead and the S&P500 finished 0.8 per cent (1399) lower at the bell. Similarly, the Dow was off 0.8 per cent (13000) while the Nasdaq fell 1.1 per cent (3048). Most of the data flow was, again, quite good and shows why in reality further stimulus isn’t really required. It may be that expectation that saw stocks off this session, because it’s likely that if Bernanke doesn’t announce anything, the disappointment could be savage. I’ve noted the contradiction numerous times over the years, but it never ceases to amaze me that people still argue for more stimulus. If you are of the opinion that the US economy is weak, then clearly the Fed’s exceptional stimulus measures to date have failed. So what would providing more stimulus achieve? It’s a simple question and the answer is self-evident on that view. And yet people still argue for more stimulus – it’s truly incredible and people seem to have given up on thinking.

Anyway, as to that data, US personal spending rose by a solid 0.4 per cent in July, which was broadly as expected (0.5 per cent), while income rose 0.3 per cent (0.3 per cent expected). They were good numbers, again supporting my view that growth remains robust and the recovery unaltered. Jobless claims complemented that, remaining at a comparatively low 374,000 in the week to August 25 – which is consistent with ongoing solid jobs growth.

Despite this, commodities too were weaker and crude fell a further 0.9 per cent ($94.6) as Isaac was downgraded to a tropical storm. In the metals space, gold was down about $5 to $1657, then copper fell 0.1 per cent and silver was 1.4 per cent lower.

As for rates, the US 10-year Treasury yield was down about 1bp or so to 1.6313, the 5-year yield sits at 0.67 per cent while the 2-year is at 0.27 per cent. Aussie futures were 4 ticks higher on the 3s (97.54) and just over 2 ticks on the 10s (96.99).

Finally then and in the forex space, the Australian dollar and sterling followed the euro and came off about the same amount. Broad-based US dollar buying is the story here and so the Aussie was off just over 50 pips to 1.0291. Smilarly sterling fell 60 pips to 1.5786 while yen for its part is at 78.61.

Bits and piece otherwise – the German unemployment rate was steady at a low 6.8 per cent while the eurozone business climate indicators improve fractionally, to -1.21 from -1.27. Other than that, the US personal consumption expenditure deflation was flat in July and 1.6 per cent higher year-on-year.

The SPI suggests the Aussie market will lose a further 0.3 per cent today (4290). The dataflow today includes Japanese inflation (0930 AEST) and probably more importantly industrial production (0950 AEST). For Australia the only dataflow is the private sector credit numbers, which are expected to rise 0.4 per cent – still very soft. European data then kicks off this afternoon at 1600 AEST with German retail sales and is followed by the eurozone CPI and unemployment numbers.

Tonight of course it’s all about Jackson Hole. Will they or won’t they? It’s just a guess of course, but I’ve previously argued that they’ll hold off 'til the end-of-year fiscal cliff theatrics and I’m sticking to that guess. Plenty of scope to be wrong either way, which just adds to the excitement – and the volatility. Other than that we also see the University of Michigan’s final estimate of consumer confidence for August and factory orders. I think the Chinese manufacturing PMI is due out sometime today or over the weekend as well.

That’s about the lot, so a good weekend to all. Have a great day…

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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