News and views
A lot of US economic data was released night, most of it weaker than expected. Durable goods orders were particularly awful, falling by 6.2% against expectations of -3%. When so many data readings are actually worse than expected, this tells us that the market has not fully priced in the adverse economic conditions, a necessary condition for a sustained turnaround in the markets. In spite of this, the Dow has maintained its recent strength above the key 8000, this morning at 8520.
NZD: The mild positive sentiment continued for the third day, and overnight action, while uneventful, saw it reach a high of 0.5516. It is currently unchanged from that level, but all eyes will be on the merchandise trade release this morning and the NBNZ business confidence number this afternoon. Both have the potential to affect the NZD today.
AUD: Breaching 65 cents late in the US session, to a high of 0.6517, confirms the positive short-term tone to this currency. Yesterday’s news that third quarter construction work done was much higher than expected supports the mood.
Demand for the EUR fell on market pessimism over the adequacy of a European stimulus package released last night; it is worth EUR200 billion, equivalent to 1.5% of GDP. From an early high of 1.3028, EUR stepped downwards to its current 1.2870. Japanese fund managers were seen aggressively selling EUR/JPY late in the US session. USD/JPY is locked in a narrow 94.6 to 95.6 range. China cutting its rates by 100 basis points yesterday limited any JPY rallies, given JPY’s role as a weak proxy for the CNY.
US personal income and spending reports showed an increasingly cautious consumer. Income rose by a stronger than expected 0.3% in October, while the 1% fall in spending was the largest drop since September 2001, but was in line with expectations. The surprise was that only about half of the drop could be attributed to prices, with gasoline prices tumbling through October; the remainder points to a sharp pullback in sales volumes.
US durable goods orders fell 6.2% in Oct, more than expected. The 11.1% drop in transportation orders had been flagged by a sharp drop in plane orders from Boeing, but the 4.4% drop in ex-transport orders points to broad-based weakness in the industrial sectors.
The Chicago PMI fell further to 33.8 in November, the lowest level since 1982. Production picked up slightly but new orders continued to slump, reaching 27.2 compared to 60.2 just three months earlier. As in other region factory surveys, the employment component slid further, from 41.5 to 33.4 – more confirmation that the official payrolls figures are about to get even worse.
US initial jobless claims fell by 14k to 529k last week. The previous week may have been distorted by the Veteran’s Day holiday, but the overall picture is a steep uptrend in recent months. Continuing claims also pulled back from 4016k to 3962k in the previous week.
US new home sales fell 5.3% in Oct, in line with expectations. Sales of existing homes continue to cannibalise new home sales, and the drop in mortgage rates after the mortgage agencies Fannie Mae and Freddie Mac were nationalised in September proved to be shortlived. The median sale price fell 1.7% to $218k, leaving an annual rate of decline of 7%.
Nov University of Michigan sentiment index for was revised down to 55.3, a new low for this cycle. The current conditions index also reached a new cycle low of 57.5, while expectations fell to 53.9 but held above the June low of 49.2. Inflation expectations a year ahead fell from 3.9% to 2.9%, reflecting the drop in gasoline prices.
German inflation fell sharply from 2.4% to 1.4% in the first estimate for November. Falling fuel prices, and base effects as large monthly gains from a year ago drop out of the annual figures, will see a sharp pullback in annual inflation across the euro area, putting more pressure on the ECB to ease interest rates.
The European Commission announced a fiscal stimulus plan for member states totalling around EUR200bn, or 1.5% of GDP. Each member will develop their own plans for how the stimulus will be provided.
China’s central bank cut its benchmark lending rate by 108 bps to 5.58%, the fourth cut since September and the largest in 11 years. Reserve requirements were reduced from 17% to 16 for the largest banks, and from 16% to 14% for the others. The move reflects a rapid shift in stance by policy makers, from containing inflation to avoiding a severe slowdown (GDP growth below 8%, as a rule of thumb).
Outlook
The positive tone in NZD should continue over the next day, although today’s US Thanksgiving holiday will reduce market liquidity and potentially increase volatility. A range of 55 cents to 56 cents should suffice for the day, with the caveat regarding volatility.
