SCOREBOARD: Sucker's rally

The US Treasury (UTS) market saw a bout of good old fashioned profit taking on Wednesday night. The market had been priced for pain, and when the non-manufacturing ISM index printed better than expected ( 4.7 points to 49.3 versus market forecast of 47.3) the market gave US rates across the curve. There had been an earlier attempt to rally, following a sour ADP survey (-23k versus market forecast 18k, with a -11k revision to the previous month), however this survey is unreliable, so that rally couldn't make any headway. There was a spot of closing by intra-day shorts late session, when the Beige book was awful (all regions saw slower growth, with services and manufacturing both on the nose), however the market never really firmed up. Front NYMEX got close to $US105 a barrel, which helped the curve steepen.

The equity market got a large lift from the non-manufacturing ISM report, however I think that it's a sucker's rally – and the fact that the market was reliably offered on tops suggests to me that I'm not the only one. Oil led the way up, which fits with the oil price going so high – and OPEC confirming that they'll leave production at current levels. Commodities had a blinder – oil, gold, copper etc all up. Gold made $US992/oz, and though it looks pretty toppish at the moment, it's got a proven ability to rally despite the technical charts. The Dow closed 41pts (0.34 per cent), and the S&P was 0.55 per cent, leading our March SPI contract 0.8 per cent in overnight trade. We're a commodity economy, and if this keeps up, we should outperform by more.

Aussie futures are lower, following USTs down – though significantly outperforming them. The 3s and 10s are both -3 ticks (93.57 and 93.79 respectively) against US 2s 4.8 basis points (1.674 per cent) and 10s 11.2bps (3.708 per cent). There is some chance that Aussie rates will sell off a little at the open, as this degree of underperformance is unusual. Without the sucking sound coming from the US the RBA remains in play, and the Aussie short end will struggle, however the degree outperformance by Aussie 10s suggests that they may slip regardless, and thereby keep up the curve steepening for now. Aussie bills are off a few ticks, following Eurodollars down – but again, outperforming. US swap spreads are wider again, in part this can be explained by the increase in floating rates (due to the Eurodollars selling off), however the move over the past two days is too large to be simply explained by the increase in short rates.

Across the Tasman, the RBNZ left rates unchanged at 8.25 per cent, and made a statement that I thought was a little dovish. They signalled that they are on hold for now, which went against many forecasts of a rate cut in the second half of 2008, however they forecast a wider output gap and a lower bill track, and that tells me that the ship is turning. The Kiwi economy is highly leveraged to housing and dairy, and will turn quickly – remember how we were debating US rate hikes in the second quarter of 2007, and cutting in the third quarter?

Today, we have Aussie January building (a dead cat bounce) and trade (an import driven deficit, as domestic demand sucks in goods). The Bank of England and European Central Bank are both expected to leave rates on hold (5.25 per cent and 4 per cent respectively) however the BoE is the best chance at a surprise. US data is likely to show a weak labour market (claims high and rising) and Fed speakers are likely to remain gloomy.