SCOREBOARD: Viva Italia!

New stability for Italy's government and US easing talk saw European markets bounce and Wall Street record new highs.

It looks as though political resolution in Italy and perhaps a hint that the Fed may not pull in QE at their meeting this Thursday (surprise, surprise) has given markets a boost – and this time commodities joined in the fun, too. Gains were good with the major European indices closing 1.5 per cent higher on the CaC, 0.8 per cent on the Dax and 0.5 per cent on the FTSE.

The Italian news came over the weekend: they have a functioning government (for now) so everyone can relax. Certainly the Italian Treasury will be more relaxed after raising €6 billion in 5-year and 10-year bonds at 3.94 per cent, compared to 4.66 per cent last month, and 2.8 per cent compared to 3.65 per cent last time, respectively. These are very low rates and in the secondary market we saw the Italian and Spanish 10-years drop 15 and 12 bps respectively to 3.87 per cent (the low of the last 50 years was around 3.32 per cent) and 4.16 per cent.

And people say austerity isn’t working! When you read someone stating that, just show them the figures. The fact is anyone who says that simply doesn’t understand what the European crisis is about or have any understanding of history. Everything is looking much better for the Europeans now.

Anyway, moving on – in the US the S&P500 closed 0.7 per cent higher to a new record (1593), as did the Dow (14,818). Tech stocks were the leaders here with the Nasdaq up 0.9 per cent (3307), but we saw solid gains in the energy and basic materials space and that’s the commodity story. Crude was up 1.5 per cent ($94.4), copper up 1 per cent and gold $20 higher to $1473.

These good gains were also supported by some minor but positive data. We saw pending home sales up 1.5 per cent in March after a 1 per cent fall. Then personal incomes and spending were higher than expected in March – this is great because we already know that consumers made a very strong contribution to growth in that quarter. Specifically, spending rose 0.2 per cent, which was stronger than expectations of no change – and this comes after a 0.7 per cent gain the previous month. As for incomes, they were up 0.2 per cent following a 1.1 per cent gain – all good, and it goes to show the strength of the US recovery.

For the price action elsewhere we saw a decent bid for the Australian dollar (up about 45 pips to 1.3052). Pretty good really, considering the senseless ramblings about another recession here – this is our fifth 'recession', by the way, since 2008.

As an aside, watching the news last night was depressing. What is wrong with people? Here we are, a rich, prosperous nation with solid growth rates and one of the lowest unemployment rates around, and we are obsessed with recessions we don’t even have. The national discussion has completely detached from our economic reality, spurred on by economists who haven’t been able to call the cycle successfully.

Everywhere you turn – the papers, current affairs, the lot – are all on about how we have to take a hit to our standard of living because the end of the mining boom will be the end of our prosperity. What tripe! Completely mental. Dear readers, this is the same crap we’ve been spoon fed in one way or another for five years. Notice anything? It never occurs! And it won’t now.

But I digress – the euro also saw a bid, up about 50 pips to 1.3098, with the British pound down smalls to 1.5499. The yen sits little changed at 97.74. As for US treasuries, yields were up  smalls with the 10-year at 1.668 per cent, the 5-year at 0.677 per cent and the 2-year at 0.215 per cent – and that was despite a moderation in an inflation gauge, the PCE deflator. Like Germany’s inflation rate, which slipped to 1.1 per cent from 1.8 per cent, US inflation has slipped on lower energy prices and other temporary factors. The core went from 1.3 per cent to 1.1 per cent, having been at 1.7 per cent late last year.

For today, the SPI suggests our stocks will rise a further 0.4 per cent. Then there’s a bit of Aussie data that’s worth watching – the Reserve Bank's private sector credit numbers. Low at the moment with little sign that the bank's rate cuts to date are doing anything, which as the logic goes means they should cut more.

This afternoon we see German retail sales and labour data. Currently the unemployment rate is low at 6.9 per cent. Later in the evening we see eurozone unemployment data – currently a not so low 12.1 per cent – and inflation data. Like Germany's inflation figures, softer energy prices will likely see a temporary slowing in inflation. Finally for the US there isn’t much – some house price data, consumer confidence and employment costs.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.

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