SCOREBOARD: Currency infatuation

A pretty decent sell-off for equities and commodities on Friday night doesn’t suggest a great start to our week. Part of the problem was some disappointing US consumer spending statistics for April, which showed spending down 0.2 per cent – worse than the expectation for a flat outcome. Incomes growth flatlined in the month as well and other data out wasn’t sufficient to offset it.

So for instance the final estimate of Michigan University’s consumer sentiment survey rose to 84.5 from 83.7 and we saw mixed manufacturing data – up in Chicago, down in Milwaukie. Realistically none of it was really top tier data though, nothing that you’d look at and think ‘Oh yeah – US stocks should be down about 1 (Nasdaq) to 1.4 per cent (Dow and S&P500).’

European equities should be down 0.6-1 per cent though, especially as the news out of China wasn’t bad either. The official China PMI came out after session close though on Saturday. It was slightly higher at 50.8 from 50.6, which is actually better than a quick look would suggest. It may have come out after markets were closed, but it’s not like weakness was expected. Don’t forget the narrative here is China weakness. This data doesn’t suggest the economy is booming, but neither does it show the much talked about weakness either – not bad news is good news. So why stocks were off so much is pretty hard to pinpoint, in terms of news specific items for the session. 

People are worried by QE, sure, and bond yields did rise again for the session – the US 10-year Treasury up 6 bps to 2.13 per cent, which caps off the biggest one-month sell-off in Treasuries in over two years (yields up over 50 bps for the month). But then there is plenty of ammo for doves to use to justify QE forever – not least of which is this temporary dip in inflation. The figures on Friday suggest core inflation is running at 1.1 per cent, which is going to be more than sufficient to get all the doves on the FOMC champing at the bit. Don’t forget these people printed when inflation, only last year, was well over their target and pushing higher. They’ll certainly use this temporary dip to at least suggest more time.

I can only assume that computer algorithms are having a very hard time computing all the conflicting signals – ‘that does not compute’ must be coming up quite a bit.

We might have a better idea at the end of this week as to what the dominant narrative will be. We get payrolls (+168,000 forecast) and if you recall they’ve been showing very strong employment growth. We get another kick from that – and it's game over for the undead zombie pessimists. The market reaction to the data is going to be impossible to predict though. A strong figure is good, but computer algos have been programmed by teenage gamers to take it as bad given it’ll be further ammo for a QE tapering. If it’s a soft number, then what – Summer slowdown? Double dip? But then more QE – what’s a poor algo to do?

Closer to home we get the first-quarter GDP figures on Wednesday. Growth for some years now has been quite good around trend with domestic demand often growing at rates faster than trend. Everyone is geared up for recession here again though. Although remember this isn’t new, we’ve been dealing with the recession call for five straight years now. For this quarter, the market consensus is for a pretty solid number – 0.8 per cent for the quarter. Now we may not get that – economic data is volatile, more so now that business investment is making a strong contribution to growth. A lot will depend on swing factors like net exports (Tuesday 1130 AEST), inventories (today same time) and the public accounts (Tuesday 1130 AEST).

The problem is, none of these really tell you about the underlying momentum which is solid and has been for many years. Not that this really matters for policy. Regardless of what the numbers show, you will read about how it’s the end of the mining boom right now and that we are headed for a downturn. Whenever we’ve seen a decent result it always followed by, ‘It won’t last – the mining boom is over, there won’t be a smooth transition', etc. That it has lasted for years seems to be lost on people.

The fact is growth, the fundamental factors driving growth and the underlying momentum, all suggest our economy is doing well. So be wary of the doomsayers, they have no credibility. They are spruiking the same old rubbish they have been for years. The specifics might change but the pessimistic message is unchanging – and wrong.

The fact is, a lot of that rhetoric is driven by this campaign to see policy action on the Australian dollar. Same old, here – lazy business leaders whose sole idea of running a business is to rely corporate welfare and policy support. The PR is that is we need much lower interest rates and a lower Australian dollar to transition the economy. Despite the fact that most of the country – most of the economy – benefits from a strong dollar and that a higher dollar normally follows a rising equity market and strong GDP outcomes.

On that note, we see the Reserve Bank decision on Tuesday at 1430 AEST. No one is looking for a cut at this meeting although with the Australian dollar as the target you can’t rule it out. Don’t forget the market doesn’t know what exchange rate the protagonists want – is 0.96 too high? Most likely, is the answer. Most people seem to be talking 0.75-80 (for no real reason other than times seemed to be so good then) and so the bank will cut again – it’s just a question of when.

A few things to look out for otherwise – RP Data Rismark’s house prices at 1000 AEST and then a non-manufacturing PMI for China at 1100 AEST. Aussie retail sales are also out at 1130 AEST and don’t forget the US ISM survey tonight.

Have a great day…

Adam Carr is a leading market economist.

Follow @AdamCarrEcon on Twitter.