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US Philly Fed index improved to –12.7 in Aug

Fri, Aug 22 2008, 05:55 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The US dollar see-sawed in London but its direction became clear in the New York session – down. US investors took a dim view of the reports that Lehman Bros had failed to secure fresh investment from Korea and China.
Commodities were snapped up once more, with the CRB index up 3.3% in afternoon trade. Crude oil sprang back to life after drifting around $116.50/ bbl, surging through $121/bbl for the first time since 7 August.

The New Zealand dollar added a cent from its 0.7103 London low to start the day just above 0.72. AUD/USD followed broad USD sentiment, falling as far as 0.8650 in London before rallying strongly to 0.8790 as commodities surged.

EUR/USD slipped back from 1.4820 on soft German manufacturing data to as low as 1.4743 in uncertain London trade but then established a firm rally to as high as 1.4897. USD/JPY’s biggest moves were in Asia, but it did lose about another 30 pips overnight to 108.55.

US Philly Fed index improved to –12.7 in Aug, with shipments and jobs the components that were most improved, albeit still declining. Also the prices measure dipped to a 3 month low – a further indication that producer prices will tumble in August.

The US leading index fell 0.7% in July, mainly due to plunging building permits which added 0.4 ppts to the June result but subtracted 0.5 ppts from July, due to the new building code introduced in NY on July 1.
Jobless claims and the weaker stockmarket also weighed heavily on the index. Consumer expectations were the biggest positive, reflecting the improvement in sentiment now that gasoline prices are falling. The signal from the index is subdued re growth prospects, but not as weak as it was earlier this year.

US initial jobless claims fell 13k to 432k last week, but they remain distorted by the impact of changed claiming rules that have been well publicised and so taken advantage of by new and existing claimants. That said, the recent run-up in continuing claims looks to be at least partially genuine and the Labor Dept spokesman has said that “an increase in firings” was a contributory factor. But we just can’t be precise about it.

Canadian inflation rose to 3.4% yr in July, mainly due to soaring gasoline prices, though there was some offset from lower automobile prices, which also helped constrain the core rate to 1.5% yr (below the 1-3% target mid-point) for the fourth month running.

Euroland advance PMIs. Both the services and factory PMIs held well below 50 for the third month running in August, a strong signal that Euroland GDP growth will contract slightly in Q3, on top of Q2’s 0.2% pull-back from Q1’s growth spurt.

UK retail sales up 0.8% in July, but given the large swings in May-June and the continued slippage in the annual growth rate, the underlying story remains subdued. Also, business investment fell 1.9% in Q2, weak enough to confirm our view that GDP growth will be revised down from 0.2% to 0.1%; indeed a stalled Q2 is now possible (Q2 revisions are due tonight).

Outlook

The NZD continues to be aided by a quiet domestic calendar and some trimming of short positions after recent NZ data beat the gloomiest scenarios. NZD/USD should extend its recovery, but we are more neutral on the overall trade-weighted index.

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Published on  Fri, Aug 22 2008, 06:01 GMT