Two common rebuttals to the world growth narrative I’ve been seeing lately, concern the ECRI index and the Baltic dry index. Both have collapsed lately and numerous emails have been sent to me highlighting them as proof the world is stuffed. Now I do on occasion look at both of these indicators because, as with most things, they do contain some useful information. It is however, a mistake to look at them or rely on them as flawless leading indicators.
In fact the Baltic dry index is not a vey reliable indicator for global growth at all. For instance in 2005 from about April to August the index fell 60%. Commodity prices throughout the same period didn’t fall and the global economy didn’t contract – US GDP averaged around 3%. The fact that freight rates are so low could be due to any number of factors - such as an excess supply of shipping etc. This doesn’t mean the world is collapsing though. It just means that we haven’t fully utilised excess shipping capacity - yet. The world is still growing, there are just more ships than we currently need. The global recovery is still fairly young after all.
Now as for the ECRI, well, all I have to say here is that the index is volatile. I mean seriously people. Go back all the way to May. What was the index telling you then? With a growth rate of 12-13%, it was telling you that the US economy was undergoing a very strong v-shaped recovery. So what happened to that? Why would the index be more correct now than back in May?
I think, like so many indicators we’re looking at (consumer confidence etc), that sharp swings in this one are symptomatic of financial market volatility – the news flow – and as a result, the usual leading indicator properties are blunted. You can’t look at this index and get all depressed when only a few months ago it was telling you how great things were – get real.
With that out of the way, what should we look for to determine if the world, or big chunks of it, are going to double dip? I suggest we look for an actual contraction in activity - a broad-based, sustained contraction - something more than just the usual monthly volatility. We can’t just point to a moderation in growth rates – which, I might add is a completely normal occurrence in any recovery. We can’t line up the monthly indicators and freak out if they’ve slowed from last month or failed to beat expectations. This happens all the time. It is normal and is not a reliable indicator that a recession will follow. A broad-based contraction in activity is however, a pretty good indication. So we need to look at the bigger picture, the whole canvass.
Anyway, on to the events of last night. Risk was back on – a bit at least, although volumes have been fairly light lately. An earnings report from Halliburton showing an 83% lift in Q2 profits (eps of 53c v consensus of 37c) helped push the market higher and offset a 2pt fall in the NAHB housing market index (lowest now in about 15 months). Trading in a 13pt range (or 1.2% range) the S&P500 ended up 0.6% (1071). Utilities, technology and energy were the key outperformers, with financials, consumer goods and basic materials lagging. The Dow rose 56pts (10154), the Nasdaq was up 0.9% (21968) and the SPI was down 0.1% (4324). After the close, IBM reported revenues that missed market expectations (by $500m) due to the weaker euro. Revenues were up 2% in the quarter, so the stock sold off 4% in extended trading. Texas Instruments eps met expectations at 0.62c (revenues up 42%) and gave an upbeat assessment for Q3 - so the stock sold off about 3% and S&P futures are down 0.4%.
Commodities saw a modest bid as a result – crude up 0.5% 9$76.4), copper in NY up 0.3% although gold was down about $9 to $1183. Otherwise eur pushed higher (up 59pips to 1.2946) with Sterling off 66pips (1.5227). AUD was flat at 0.8685 and Yen sits at 86.72 (little changed).
Rates saw little action with light volumes and narrow ranges (2-6bp). US treasuries sold off, but barely (yields up 1-3bp). The 2yr sits at 0.59%, the 5yr at 1.7% and the 10yr at 2.96%. Aussie futures were a little more aggressive the 3s and 10s down 8-7ticks respectively and on a 9-10 tick range. 3s are at 95.34 and 10s at 94.83.
Bits and pieces otherwise – a survey in the US (NABE) suggests plans to lift payrolls over the next 6months are at their highest since January 2008. Then the ECB doesn’t really seem to be buying euro zone bonds and talk is they may phase the program out.
Today in Oz we get the RBA’s minutes. Now as we learnt from the press release following the rate decision on July 6 - they’re not bearish. They remain optimistic on the domestic and global recoveries. Having said that, they stand ready to delay any further tightening as a result of financial market sentiment. All fair. One week is a long time when you are talking price action however, and realistically, in the face of an elevated CPI and a bounce back in sentiment, the RBA will hike again. The fact that another rate hike is about 30% priced for the rest of the year is a bit of a stretch when you consider that 100k jobs were created in Q2, inflation is already above the band etc etc. Steven’s speech at 1pm on “some long -run Effects of the Financial Crisis” is unlikely then to add much more colour.
Tonight check out US housing starts, German producer prices, UK mortgage approvals and the bank of Canada rate announcement (+25bp expected).
Before I sign off a quick plug for Market Rock this Thursday.
“It will be the seventh year in row the Australian money markets gather together for what is really the only true market function, held at The Basement in Circular Quay. The function is a veritable battle of financial market bands, where aspiring rockers from various financial institutions such as ICAP, CBA, ANZ, CITIBANK, ABERDEEN ASSET MANAGEMENT,MF GLOBAL,BANK OF SCOTLAND ply their trade in front of hundreds of adoring sweaty fans.
ICAP organiser and seasoned rocker Victor Gugger, says," This night has grown larger and larger every year, the bands get better and the fans more effervescent, it is easily the most fun and best attended night on the financial markets social calendar".
Market participants love to come along and let their hair down (if they have any left) and listen to their mates deliver their own take of classic covers from the 70's and 80's till now. Every now and then something special happens, such as an explosive tin whistle solo by the ANZ Head of global markets during a version of the classic rock track “Wild Thing" a few years back...
A guaranteed good time for all.....”
Have a great day
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