Not even a decent acceleration in the services sector could lift markets last night. And it was a great report – the non-manufacturing ISM index, which represents about 80 per cent or so of the US economy, surged to 56 in July from 52.2. Production surged 9 points, new orders were up nearly 7 points although employment dipped 1.5 points. A great report though, and one which complements other indicators showing a very strong turnaround in activity in the second half.
Now, that report was the key economic indicator out overnight and as good as it was, US stocks closed down smalls. The S&P500 was off 0.2 per cent (1707), the Dow 0.3 per cent (15,612) and the Nasdaq rose 0.1 per cent. It was a similar session in Europe. Most indices were around zero and commodities too were all weaker. Gold fell almost $10 to $1300, copper was off 0.2 per cent and crude (West Texas Intermediate) fell 0.5 per cent to $106.4.
The bearish influence on crude last night – not that there is much bullish news with many concerned about a China hard landing – came from the Libyan oil minister, who said that Libya would increase crude output next month to 800,000 barrels per day from 700,000. Throw in investigations into price fixing in the crude space and a proposal from regulators to further monitor price moves and there isn’t much to be bullish about here.
Price action was otherwise subdued elsewhere. We saw the Australian dollar trade up about 30 pips to 0.8929, the euro was off 15 pips to 1.326, while the yen is at 98.27. The 10-year bond yield is up 4 bps to 2.64 per cent. Fairly quiet and no doubt equities will have a non-eventful day as well. That is, unless we see something exciting from the Reserve Bank today.
The Reserve decision is due at 1430 AEST and the unanimous expectation is that they’ll cut rates a further 25 bps to 2.5 per cent. Now, on a personal front I think it’s great they’re cutting rates – I want 50 bps and a cut to zero next month. But from a public policy perspective this is proving to be a disaster, and the sooner we’re done with this board the better for the country – that’s just my opinion. The board is far too political.
Certainly some risk takers are back in the market and we are seeing some good signs in the property sector. Prices are bouncing back, auction clearance rates are high. But this isn’t the kind of growth we need. The country needs sustainable growth – a build of actual housing in tandem with a healthy rise in prices. Not just price inflation. So we’re not seeing the kind of growth we need.
More to the point, only a fool couldn’t notice that since cutting rates about two years ago retail spending has weakened sharply. Similarly, other interest rate sensitive sectors like lending and approvals are only just coming back to pre-cut growth rates. Non-mining investment has barely budged and confidence is still low – two years later. And yet they still want to cut.
That shows an incredible lack of insight in my opinion, so I think Warwick Mckibbin has mostly got it right. He is also arguing that the Reserve Bank shouldn’t be cutting rates at this point. The big question of course is what the bank’s currency target is. Kim Carr, the federal industry minister, may have provided some guidance here – he reckons foreign car manufacturers need an Australian dollar at 80 US cents. That suggests more cuts on the way after this one – possibly many more.
Prior to the Reserve Bank decision this afternoon we see the trade balance and second quarter house prices (both at 1130 AEST). Tonight we see UK house prices, German factory orders and the US trade balance.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.