News and views
Currency markets were largely subdued after the New Zealand close, with the US equity markets again driving most of the movement. Asian equities remained largely stable, Europe ended weaker, and the Dow Jones index initially fell 250 points. The ensuing Dow recovery, led to mild gains in most currencies against the USD.
NZD firmed slightly to around 0.56 after the Dow recovered, and is holding that level at the time of writing. Earlier news of a NZ food price fall of 0.3% in October had no material effect on the currency. Interest rate investor activity saw 10 year swap rates fall 20 basis points, with the yield curve flattening by 6 basis points during the day; our steepening view remains intact.
The Dow’s recovery similarly helped AUD firm to almost 0.66, and EUR to 127.40.
US NY Fed index slips from –24.6 to –25.4 in Nov. The Empire State index posted a new all time low this month (though note the survey only began in 2001). Some of the key detail posted steeper declines than the headline, including orders, shipments and especially jobs, which plunged from –4 to –29, adding weight to the view that the labour market is now deteriorating rapidly.
US industrial production rises 1.3% in Oct, but Sep was revised down from –2.8% to –3.7%. The Oct rise reflected a partial bounce from the hurricane disruption that weighed down the Sep result, however the Fed pointed out that even excluding the tempests and the Boeing strike (which ended at the start of Nov), production would have fallen about 0.7% over the two months. Hence the underlying factory picture is one of contraction, broadly consistent with the message from the business surveys.
Japan slips into a recession. Growth contracted 0.1%qtr (0.4%saar) following in from a revised 0.9% fall in Q2. Combined with a corresponding contraction in the Eurozone and the US, the world now has to suffer with the largest developed industrialised powers in a recession. In Japan’s case, this is first time since 2001 that economic output has fallen for two consecutive quarters and was the result of weaker net exports (–0.2ppt) and capital spending (–1.7%qtr), a sign the world’s second largest economy has also become a victim of the global credit crisis and the collapse in trade activity. Consumer spending did rise 0.3%qtr, more than expected, but the seasonal factors such as a hot summer and the Olympics may have had a role to play suggesting there is a risk consumption growth may stall in Q4.
The Euroland trade deficit was €5.7bn in Sep, the same as in August. Despite lower oil prices, the deficit remains at record levels due tom weak export demand.
UK house prices down 2.9% in Nov. The Rightmove house price index fell sharply this month, though the annual pace of decline of –7.1% yr still lags the major lender house price series which have prices down around –15%yr.
Outlook
We expect the NZD to retain its weak bias, being capped at 0.58, and supported at 0.5350 - 0.5400. That support is likely to be tested during the next few weeks, given our expectations of a 100bp cut in the OCR rate in December.
