ICAP AM REPORT

US recovery concerns dominated the landscape last night, so risk trades were pulled in a bit. I can’t say the dataflow warranted, or justified these concerns however. Durable goods (a great indicator for industrial production more generally) fell again and that certainly didn’t help calm fears. Specifically, we saw a 1% fall in June which is the 2nd drop in a row. Having said that, if you exclude volatile items (and we must) orders were flat and that follows a strong 1.6% surge in May. So the actual picture being painted is still one of decent order flow and to try and read weakness into these numbers, is testing the limits of credibility

It didn’t stop there though. The Fed’s, in issuing the Beige Book, had to go and use the word ‘slowed’. What were they thinking? Personally I don’t have a problem with the word, but as we know, there is tendency for the word slowed and double-dip to be used interchangeably. In any case the Beige Book (anecdotal reports collected by the Fed) suggests that activity continued to expand since the previous survey - ie the economy improved since the last survey on June 9 – it was an upbeat assessment. Nevertheless, two districts suggested that the level of activity generally held steady and another two suggested “the rate of improvement slowed”. It’s still improving but, and this often gets lost in the rhetoric.

By sector, manufacturing continued to increase in most districts, as did the services sector. Consumer spending was described as being “generally positive” although in most districts the increases were modest. Conversely, commercial and residential real-estate was noted as being sluggish while “labor market conditions improved gradually in several districts”.

So all up it wasn’t a bad report but equities weren’t in the mood and weakened after it was released. Having hit a high in early trading (1114 or +0.2%) the S&P then went offered for the remainder of the session and closed down 0.7% (1106). All sectors outside of telecommunications actually took a dip, with the main downside from healthcare, technology and financials. Elsewhere the Dow dropped 39pts to 10497, the Nasdaq fell 1% to 2264 while the SPI was 0.4% (4489) lower.

Rates then rallied with yields on the major t.notes down about 4bp (2s and 10s) and 8bp on the 5s. The bigger move on the 5s reflects a well bid 5yr t.note auction. $37bn was up for grabs and cover at 3.06 was the strongest in about 4yrs. At the close, the 2yr yield was 0.61%, the 5yr was 1.7% and the 10yr settled at 3%. Following a strong rally yesterday in the wake of that ‘claytons’ dip in inflation, Aussie futures did little, travelling within a 5-6 tick range and ending only 1 tick higher. 3s are at 95.32 and 10s at 94.80.

Just quickly on FX and commodities, USD bounced a bit with AUD down 12pips to 0.8936, eur was off 15pips to 1.2993 and Sterling fell 21pips to 1.5588. Crude was down 0.9% ($76.82) after the US Energy Department reported a surprise lift in inventories over the week to July 23. Otherwise Dr Copper pushed out another 1% (+10% over the last week or so) while gold was up smalls ($1163).

In terms of interesting news flow there were bits and pieces. The ECB suggested that from next year collateral rules will be tougher. Not so much for sovs but weaker rated stuff like ABS etc. the ECB also reported that while banks are tightening lending standards in Q2, lending growth to consumers (and business) actually accelerated and banks expect higher loan demand next quarter. Still on central banks, the BoE governor then suggested that rates could go in either direction, although realistically I think an extension of QE is unlikely given inflation remains well above the band and the strong growth indicators to date. Finally, German inflation rose to 1.2%y/y in July from 0.8%.

The dataflow for the day includes the RBNZ at 7am followed by the NZ trade balance at 0845. For Australia, HIA’s new home sales series is out at 11am. Tonight just watch out for US jobless claims (expected to remain steady) and the EC business climate indicator.

That’s about the lot, have a great day…