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The NZD fell overnight in Europe with the poor news

Tue, Dec 2 2008, 05:28 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

This week’s mood reverts to the negative sentiment prevailing two weeks ago. US equities fell over 5% on an awful ISM release, one part of that index at a 60 year low. Combined with recent PMI figures for Eurozone, UK, Russia, and China at record lows, and well below expectations, we have a bigger picture of markets not yet discounting the bad news. Until expectations are lower than the actual readings, a positive medium-term reversal in equities and risk-currencies is unlikely to occur.

The NZD fell overnight in Europe with the poor news and the fall in US equities, from above 54 cents to just above 53 cents, and is currently tracking sideways at around 0.5350. Interest rates for 3 month bank bills fell a whopping 38bp, and expectations for a larger 150bp cut on Thursday are increasing. The size of the RBA’s interest rate cut, announced today at 16:30, will be the highlight event.

AUD also fell on the above bad news, from around 0.6480 to just above 0.6380, but recovered better than the NZD did, and is currently around 0.6550. The AUD/NZD cross has broken through the initial target of 1.20, in fact touching 1.21.

The EUR fell from around 1.27 to briefly dip under 1.26, but has recovered somewhat to 1.2660. USD/JPY had one of the largest currency falls reflecting a new safe haven rush, from around 95.30 to just above 93, and is currently not higher at 93.30.

US factory ISM falls from 38.9 to 36.2 in Nov. The factory ISM continued its three month plunge in November, falling to its lowest since 1982, when quarterly GDP growth was printing as low as –6% annualised. Almost all the activity components continued to slide, indicating a steeper pace of decline than in October. New orders fell below 30, pointing to likely further slides in the other activity indices in coming months. The exception was exports which fell at the same pace as in October, after solid growth through the first three quarters of 2008. Prices continued to fall sharply, to a six decade low, reflecting lower fuel, food and other commodity prices.

US construction spending fell 1.2% in October, exactly in line with Westpac’s forecast, but there was a surprise substantial upward revision back in August (from 0.3% to 2.4% growth) which should impart a positive bias in the next revision to Q3 GDP growth due in the final report later this month.

Japanese wages slip -0.1%. The sharp fall in production is already weighing on labour incomes with wages dropping -0.1%yr in Oct, vs expectations of a slight +0.1%yr gain.

Euroland factory PMI for November was revised down from 36.2 to 35.6, making that index’s already steep decline even steeper. The factory PMI is now at deeply recessionary levels. That point was accentuated by the further 1.6% slump in German retail spending at the start of the fourth quarter.

UK factory PMI collapsed again in Nov, to a new record low at 34.4, a level that we expect would be consistent with a decline in Q4 GDP growth of 1% or greater (we will firm up that view once the services PMI is released later this week). This news, the lack of substantial “front-loading” in last week’s fiscal stimulus package and the likelihood that November inflation will tumble from 4.5% yr to around 3.7% yr, means we are inclined to expect a BoE rate cut somewhat steeper than the 50bp we had been forecasting for this Thursday. A 75bp cut is probably more likely than 100bp given the stated view in the policy committee minutes to the Nov meeting that there is some merit in the argument that scope needs to be left to allow for further rate cuts (i.e. don’t do it all at once!). Other data included weak consumer and mortgage lending figures for October.

Canadian GDP growth accelerated from an upwardly revised 0.6% annualised in Q2 to 1.3% in Q3, despite a slightly weaker than expected 0.1% gain in the September monthly GDP report.

Outlook

Our NZD bias is back to negative, after last week’s temporary reversal, and 0.52 is now vulnerable during the week. Today, an RBA cut of 100bp would be higher than expected, and support the AUD, and, to a lesser extent, the NZD. A 75bp move would likely be neutral, while any less would add to the current negative sentiment surrounding the currencies.

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Published on  Tue, Dec 2 2008, 05:33 GMT