US markets were subdued overnight in a holiday-shortened session (July 4 holiday with markets closed tonight). At the bell, the S&P500 was 0.1 per cent higher (1615), the Dow was up 56 points (14,988), while the Nasdaq was up 0.3 per cent. Small gains as people await payroll figures, but the data was, once again, good.
First up, the ADP employment report. It’s not a perfect indicator for payrolls, but it does suggest June’s gain could be strong, showing a 188,000 increase again for that month. This was above the consensus forecast for 160,000. Similarly, jobless claims remain low and even slipped a bit in the week to June 29 (to 343,000 from 348,000).
Over in Europe, old wounds are reopening and equities tanked following the resignation of some Portuguese ministers and threats of more. It also looks like Greece won’t meet its reform targets, which they need to get the next €8 billion instalment. Austerity fatigue is the new mantra and investors are spooked. So the Dax was off 1 per cent, the CaC was 1.1 per cent lower and the FTSE100 fell 1.2 per cent. It was worse in Spain and Portugal where the key indices were down 3 per cent and 5 per cent respectively.
In the commodity space, crude got a boost from the military coup in Egypt, rising 1.6 per cent to $101.2. Having said that, gains were strong across the spectrum, copper was up 0.9 per cent, silver rose 2.3 per cent although gold was up only $9 or so to $1252.
Finally for the price action, the Aussie dollar is little changed following yesterday’s fall at 0.9086, the euro is about 30 pips higher at 1.3011 and the yen is at 99.9. Otherwise the US 10-year bond yield was up about 4 bps to 2.5 per cent.
There were a few bits and pieces otherwise. The non-manufacturing ISM index slipped to 52.2 in June from 53.7 with business activity and inventories down, but employment up. Still in the US, the trade balance widened to $US45 billion ($A48.98 billion) in May from $US40 billion as exports fell 0.3 per cent and imports surged 1.9 per cent, again as a consequence of the pick-up in domestic economic activity. Eurozone retail sales then surged 1 per cent in May after a 0.2 per cent fall in the month prior and data was out showing the UK services sector growing at the fastest pace in 2 years.
Otherwise, I found Reserve Bank governor Glenn Stevens’ speech yesterday quite interesting. Whilst emphasising that his comments weren’t in anyway intended to signal future moves in rates, he noted a few things that are worth commenting on.
As I suggested at the time, it appears the Board was quite close to cutting rates this week and they spent quite a lot of time debating whether they should. As to whether they will or not, there were few conflicting – well, what I thought were conflicting – comments.
On the one hand was a comment that the central bank “will be able to continue to do our part, consistent with our mandate, to assist the transition in sources of demand that is needed”, which strongly suggests further rate cuts on the way. However my read of the rest of the speech is that the Reserve Bank might be a bit reluctant to take the cash rate much lower.
Firstly, Stevens quite rightly noted that “no one can pretend to be able to fine tune this ‘handover’, to guarantee that the non-resources sectors strengthen, on cue, by just the right amount.” I read this as a much needed acknowledgement that there’s a limit to what monetary policy can do.
Secondly, and this is the more important bit for me: “The second thing to say is that much depends on ‘confidence’ – that intangible thing that is hard to measure and very hard to increase. We are talking here about confidence that the future will be characterised by growth, that there will be customers for products, that innovations are worth a try, and so on. That confidence seems pretty subdued right now.”
When you throw in his comment that “there is no simple policy lever that can be quickly pulled to improve it”, the natural flow-through, noting the cash rate is already at a record low, is to ask what further rate cuts would achieve. A reasonable person would note not much, as there is a clear problem with the transmission mechanism at the moment – and that is this low confidence, as I have noted repeatedly.
Stevens suggests that “Confidence-enhancing conduct of policy involves having well-established and understood frameworks, and acting consistently with those frameworks over time.” The problem I have with that at the moment is that a lower Aussie dollar as the policy target now is not well accepted – especially as no one knows what the actual target exchange rate is.
Two facts in that regard. Since the middle of last year, consumer spending has slowed sharply (confirmed again with the monthly retail sales figures yesterday) and that’s in spite of the RBA’s aggressive rate cuts – the lowest rates on record.
Moreover, we’ve also seen over that period an acceleration in jobs growth. The Australian equity market more broadly has underperformed global benchmarks and has largely missed out on the global equity bull run, while non-mining investment is still recessionary. That doesn’t look to me like the current conduct of monetary policy is lifting confidence, and the governor can’t be blind to that, even if those who would push for a lower dollar are.
For the day ahead, the SPI suggests Aussie stocks will be 0.3 per cent higher, while the key economic events include building approvals at 1130 AEST and a speech by the Deputy Reserve Bank Governor at 1230 AEST. Tonight the key events are the Bank of England and European Central Bank meetings.
Have a great day.
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.