US ISM manufacturing rises from 49.6 to 51.5 in Sep

Market wrap

Equities and risky currencies bounced in London but reversed in NY. Supportive news included Greece’s announcement of a EUR13.5bn package of fiscal measures, Fed dove Evans arguing for even more stimulus, and a positive surprise from the US ISM manufacturing survey. The former was tempered somewhat by reports IMF/EU/ECB inspectors queried EUR 2bn of the proposed spending cuts, suggesting the next tranche of aid is not imminent. The S&P500 is currently up 0.6%, as is the CRB commodities index. Fed Chairman Bernanke reiterated monetary policy themes, including the temporary nature of bond purchases, still managing to contribute to a NY session rally in US 10yr treasury notes from 1.65% to 1.61%. Eurozone peripheral bond yields closed slightly lower.

The US dollar index (DXY) is little changed. EUR rose from 1.2820 to 1.2940 but slipped with equities in NY to 1.2884. The Eurozone’s record unemployment rate of 11.4% in August was widely expected. USD/JPY firmed from 77.80 to 78.15, the Tankan report disappointing. AUD followed EUR higher in London, from 1.0330 to 1.0404, but slipped in NY to 1.0356. NZD similarly rose from 0.8270 to 0.8333, but almost completely reversed to 0.8272. AUD/NZD bounced off a 12-month low of 1.2480 to 1.2520.

Economic wrap

US ISM manufacturing rises from 49.6 to 51.5 in Sep. Although a weak outcome, it was higher than any published forecast and the first month of expansion since May. The detail showed production still contracting but orders returned to growth and jobs growth picked up.

US construction spending down 0.6% in Aug after falling 0.4% in July. The latest fall saw a non-residential spending decline offset a 0.9% gain in the residential component.

Canadian industrial product prices down 0.1% in Aug, the fourth consecutive month of decline, and the longest string of declines since late 2008. The latest month’s slippage was due to lower prices for autos and transport equipment, offsetting higher oil prices.

Euroland unemployment steady at record high 11.4% in August but revised up in prior months. Also the Euroland factory PMI was revised up from 46.0 to 46.1 in the final September reading.

UK net consumer credit fell £0.1bn in Aug on top of a larger July decline, while mortgage outstandings fell £0.3bn. New mortgage approvals were little changed at 47.7k in August. Little evidence yet that the Bank of England/ Treasury cheap funding for lending initiative has been gaining traction. In other news, Hometrack reported a 0.1% fall in house prices in Sep, the fourth month in a row without a gain, for a 0.5% yr annual pace.

Market outlook

AUD and NZD Outlook: Today’s local highlight is the RBA meeting, with a minority of economists expecting a 25bp cut to 3.25%. The market is priced for a 15bp easing so a reaction regardless of decision is likely. The GlobalDairyTrade auction will be watched for a possible fifth consecutive gain in milk prices. Spain’s PM Rajoy meets EU’s Rehn – bailout discussion?

NZD/USD 1 day: Below 0.8265. Momentum is positive but waning.

NZD/USD 1 month: Higher to 0.8470.

NZ 2yr swap yield 1 day: Opening today 1bp higher at 2.67%.

NZ 2yr swap yield 1 month: 2.65% remains the key pivotal level between a breakdown to 2.50% or a bounce to 2.80%

AUD/USD 1 day: Lower to 1.0325 or below. Momentum is negative.

AUD/USD 1 month: Higher to 1.0500+.

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