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Economic disconnect with Wall Street continues.
• Economic data a mixed bag in the US.
• RBA pauses on rates as local stocks fall.
• UK recovery slips.
The current divergence between the guts of the US economy and the stock market holds risk to the Australian dollar and should be keeping investors up at night. Economic data continues to look patchy this week as a raft of US data failed to provide consistent signals of a recovery as the fits and starts of economic growth continue. Among the positive data was Factory Orders (3%) and Construction Spending (60.4) however GDP slid to 1.8% for the first quarter and ADP Employment Change (179K) fell short of estimates. On Wall Street, earnings season has continued in full-swing dance and this has allowed the S&P500 to perform until commodity prices sent Wall Street lower overnight. Amidst whispers of a profit take, Fed stimulus expiring in June and potentially risky inflation, the risk to stocks will leave the Aussie exposed in the next two months.
Locally the stock market hasn’t been faring as well as its better looking US cousin amidst falling commodity prices. The ASX200 has lost weight down 2.75% on the week and this can be attributed to falling commodity prices with both copper and crude oil futures falling. Adding to the woes, the usually reliable banking industry had a mild correction as ANZ Bank missed profit expectations, announcing that it generated a 3% increase in net income from the previous six months. At the central bank level, the RBA is comfortable with the level of cyclone and commodity related inflation and given that Unemployment remains close to 5% considers interest rates (4.75%) “appropriate”.
Despite the lull in risk attached to sovereign debt yields in neighbouring European countries, the economic recovery looked slightly greyer in the UK. Predictions made in this report on January 20 that “this may be the year of the pound” have yet to transpire which includes a host of dovish data this week. Among the lacklustre figures were GDP (1.8%) along with some repeat offenders in House Prices (-1.3%) and Consumer Confidence (-31). Manufacturing data out of the UK is usually the stalwart propping up the economy however PMI Manufacturing (54.6) was also lower. This suggests that the usually dovish rhetoric out of the BoE may not be an attempt to undersell the pound, but rather a frank assessment of reality.
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