News and views
Safe haven or repatriation demand drove USD Index higher once more as the DJIA opened weaker and sank -500pts by the NY afternoon. Poor US data (retail sales, NY Fed manufacturing sentiment survey) helped fuel the selling of equities and risk FX. Fed chief Bernanke promised the Fed would do it all it could but he sounded suitably gloomy about the near term economic outlook. NZD/USD touched its 0.6277 in the London morning as equities staged a fleeting rally but was smacked down to 0.6065 in NY trade.
The extension of DJIA losses dragged AUD/USD down more than 3 cents, from its London probe above 0.7050 (high 0.7077) to 0.6725 in the NY afternoon.
EUR/USD pushed above 1.3680 in London but in line with broad USD recovery, retreated to 1.3525 in NY. The ECB announced it would accept a broader range of collateral to help improve liquidity, which did help Euribor rally about 10bp.
USD/JPY mostly chopped around 101.00-101.60 until the NY afternoon when risk appetite deteriorated anew, pulling the pair down to 100.60.
US retail sales down 1.2% in Sep. With 3 month annualised sales down 4% in Q3, it is now crystal clear that real consumer spending contracted quite sharply in Q3, for the first time since the early 1990s.
NY Fed factory index plunged to -25 in Oct, its lowest reading since the survey was begun seven years ago. Being a survey of factory bosses rather than an actual count of production and orders and so-forth, it is possible that responses were weighed down by all the doom and gloom being espoused by policy-makers in their efforts to justify the $700bn Paulson plan and the nationalisation of the banking system. Or, the responses could reflect bosses’ concerns that their banks are no longer rolling over their overdraft borrowing. Whatever the precise reason, it is clear that business confidence has taken a big hit over the past month.
US PPI fell 0.4% in Sep due to lower energy prices but the core up 0.4% revealed some price pressures still percolating in the factory sector, most notably for autos and light trucks which was surprising given plunging sales. But the inflation outlook remains favourable with input and intermediate prices now falling and the economy slipping into recession. Other data included a 0.3% rise in business inventories in August.
The Fed Beige Book reported evidence of weaker activity across the US in September. Consumer spending was down in most districts (consistent with the retail sales figures); manufacturing, housing and services were mostly softer, and credit conditions were described as “tight” across all districts. Inflation pressures moderated a little, though many districts reported ongoing pass-through of earlier price increases for metals, food and energy.
Fed Chairman Bernanke cautioned that economic growth is likely to remain below potential for some time, even after confidence in the financial system returns.
Euroland inflation was confirmed at 3.6% yr in Sep (unrevised from the flash estimate), and the core rate was unchanged at 1.9% yr. With pipeline price pressures easing and the economy in recession, inflation will fall well below 2% by 2010.
The Norwegian central bank cut rates by 50bp to 5.25% matching the Swedes and other major banks’ moves last week.
UK jobs market continues to slump. Unemployment posted another 30k+ gain in Sep; the household survey jobless rate jumped a further 0.2 ppts in August to be up 0.5 pts in just three months; and employment contracted in the three months to August by 122k. That compares to gains of 148k, 126k and 47k in the previous three quarters, so steadily slower job gains have now given away to steep job losses. Earnings growth eased to its slowest pace in five years in August.
Outlook
At the margin, the lack of long NZD longs to be unwound still helps the currency versus AUD during risk aversion surges and vice versa. NZD/USD direction remains tied to USD safe haven demand which we are inclined to see waning in coming weeks after the slew of aggressive government action.
