News and views
Currencies continued to look to equity markets for direction, ensuring another rollercoaster ride on Friday night. The major currencies were flat or slightly higher against the US dollar during the New York session, but US equities gave up the ghost near the end of the day, with the Dow dropping 400pts to end on its lows for the day. Disappointment with the G20 statement over the weekend is likely to see further safe-haven flows into the USD as markets begin the week. As with the G7 meeting last month, the statement was full of good intentions but little in the way of near-term solutions, beyond recommending more of the same – aggressive fiscal and monetary stimulus.
NZD again held a relatively tight range, until the end of day slump in US equities took the currency below 0.5550. The disappointing G20 statement saw the NZD open this morning at a three-week low of 0.5510. AUD was one of the better performers early in the overnight session, reaching 0.6650, before slumping back to 0.6450 this morning.
EUR shrugged off confirmation that the euro zone is in recession, and looked to be ending the day on a high of 1.2800, before the late US equity collapse pulled it back to 1.2550. GBP had a bid tone early on and outperformed EUR for the first time all week, but eventually succumbed to the same fate as the other currencies. USD/JPY was the only ‘carry trade’ to hold its ground as equities plunged, but the G20 statement saw it open a big figure lower at 96 this morning.
US retail sales falls 2.8% in Oct. Retail sales posted their steepest monthly decline since the current series was established in the early 1990s, with the 2.8% slump just shy of Westpac’s forecast 3% fall. Auto sales were a key drag. The other factor which exaggerated sales weakness was lower gasoline prices, down 20% in October compared to September, which shaved 1.3ppt off the nominal retail headline. Core retailing excluding these components (autos & gas) was down a modest 0.5% but that is the third consecutive month of decline and adds weight to the view that Q3’s consumer spending contraction will persist into Q4.
US consumer sentiment was little changed at 57.9 in the early November survey from the Uni of Michigan. That compares to the 25% jump in the IBD-TIPP survey for November. Just goes to show – survey different people on different days and you can get very different responses. Collapsing gasoline prices and the Obama election win clearly had less impact in the later survey; we now await the Conference Board survey at the end of the month.
Other US data included a 4.7% plunge in import prices in October, reflecting falling oil prices and the stronger US dollar; and a 0.2% in business inventories in September. Speaking in Frankfurt at a conference celebrating 10 years of the euro, Fed chair Bernanke said central banks globally stood ready to take “additional steps” without specifying what they might be.
Q3 GDP data confirmed today that the Euroland economy has been in recession since about Easter this year. GDP fell 0.2% in Q2 and Q3; the contraction to date has been mild, thanks in part to modest 0.1% growth in France in Q3, and stalled rather than negative growth in Holland in the last two quarters.
Euroland inflation was confirmed at 3.2% yr in October (unrevised from the flash estimate), and the core rate was unchanged at 1.9% yr. With pipeline price pressures easing and the economy now in recession, there is now considerable risk that inflation will fall well below 2% next year.
Canadian auto sales rose 2.5% in September, after three monthly declines in June to August; StatCan guidance for October was that sales “edged down” again. Manufacturing shipments rose 0.1% in September after falling 3.7% in August. A decline had been expected, but a surprise jump in the aerospace component (probably temporary given recent weak orders) prevented that.
Outlook
We are neutral on NZD in the short term. News from the corporate world is dominating investor sentiment at the moment, but we feel this should be at least balanced out by the extent of fiscal stimulus and other government support that is being unleashed around the world. Looking ahead, NZD will need to remain below its long-term average for an extended period to soften the blow of a weaker world economy.
