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Morning Report

After a quiet London morning the overnight session heated up in New York trading

Thu, Jul 17 2008, 06:00 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

After a quiet London morning the overnight session heated up in New York trading. The first news was a stronger than expected US CPI result. This saw the USD initially trade higher before markets focused on stagflation concerns, and sold the USD a little (with gold also firmer). Later the weekly oil inventory data was stronger than expected which saw oil retrace sharply, boosting the USD. And then during his Q&A session Fed Chairman Bernanke commented on FX intervention – again supporting the greenback. For the New Zealand dollar this saw the pair dip below 0.7700 but then recover in line with a Wall Street rally to be little changed overall.

The Australian dollar was also largely driven by USD direction, with a slight underperformance bias due to yesterday’s more dovish than expected RBA Governor Stevens speech. The AUD/USD consolidated around 0.9740 late NY, down 40 pips.

USD/JPY traded under 104 in the NY morning but rebounded back towards 105 amid improved USD and equity sentiment.

EUR/USD was up on the higher US CPI stagflation concern but then shed more than a cent at 1.5815 by late NY as oil traded $12 lower than Tue’s highs and US equities extended gains.

US CPI jumped a shocking 1.1% in June (its second highest monthly move since the early 1980s), pushing the annual rate up to 5% yr, its fastest since the early 1990s. In June, energy surged 6.6% (including gasoline up 10.1%) which the BLS has said previously is in part due to the seasonal factors weighing against the energy component in April-May but then paying back in June. Food prices rose a steep 0.7%. The core rate rose by a sold 0.3%, reflecting renewed strength in the shelter component (up 0.3%) after a string of more benign outcomes; a 0.1% rise in apparel (though prices here are still slightly lower than a year ago); auto prices up 0.1% after a series of declines; and an above trend gain in education of 0.5%. Medical care costs continued subdued, up 0.2% last month.

US industrial production rose 0.5% in June, thanks to a bounce in utility (and also mining) output and stronger auto production following the end of a strike. But manufacturing was subdued (even with the auto bounce), rising just 0.2% after a 1% fall earlier in Q2; ex autos, manufacturing was down 0.1%, its third consecutive decline. These data still indicate mild recession in the factory sector, with total manufacturing contracting 0.6% yr.

Fed chair Bernanke testified again, in the House. He reiterated his main points from Tuesday, but also said he doesn’t place much weight on a technical recession call. On fx intervention, he said it should be used “only rarely”.

The minutes to the June 25/6 FOMC meeting were actually more consistent with Bernanke’s testimony this week than with the June statement. Members noted that downside risks to growth were still “significant”, and felt that the recent firming in household spending wouldn’t be sustained. Even so, some members favoured a rate rise “very soon” to combat inflation.

In other US news, the TIC data showed that capital flows were less supportive of the US$ in May than in April; the NAHB homebuilder sentiment index fell to a new record low of 16 in July.

Japanese May tertiary activity index softer than anticipated. The index fell 0.2% in May, following an upwardly revised 1.9% rise in April.

The Euroland CPI was unrevised at 4% yr in June, but the core rate edged up a tick to 1.8% yr.

The UK jobs market continues to soften. Unemployment rose 16k, its fastest monthly pace in June since the early 1990s, sufficient to lift the benefit claimant jobless rate from its record low, up a tick to 2.6%.

Outlook

We continue to like NZD/USD lower multi week especially on a TWI basis. However, this week’s stronger than expected CPI release should hold off further rate cut expectations for now, hence the NZD is likely to range trade ahead of next week’s RBNZ meeting.

• Dowload Full Morning Report

Published on  Thu, Jul 17 2008, 06:07 GMT

Archive

• US consumer confidence rose to 56.9 in Aug
  Published On Wed, Aug 27 2008, 10:18 GMT
• USD traded softer to start the week as US stock prices tumbled
  Published On Tue, Aug 26 2008, 08:19 GMT
• USD/JPY ground up from 109.00 to flicker above 110.00 in late NY
  Published On Mon, Aug 25 2008, 06:48 GMT
• US Philly Fed index improved to –12.7 in Aug
  Published On Fri, Aug 22 2008, 05:55 GMT
• Japanese June all-industry activity index fell 0.9%
  Published On Thu, Aug 21 2008, 05:58 GMT

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Westpac Institutional Bank  | ABN 33 007 457 14
http://www.westpac.co.nz | natalie_denne@westpac.co.nz