News and views
A pause for breath best describes Friday night’s global action. After 7 consecutive down days, equities staged a minor rally, although this is likely to be short lived, given the banks index still fell 5%. The rally catalyst, as has often been the case lately, was bailout related news: the US Government taking a large stake in Bank of America, rumours of Citigroup being nationalised, and discussion of the government creating a new bank to absorb toxic assets. The S&P500 gained 1%, after Europe’s +1.5%. Commodities also fared well, oil +1%, gold +3%, and copper +5%, as did most currencies against the USD.
The NZD ranged sideways, between 0.54 and 0.5530, after the NZ sessions gains, and remains in a short-lived corrective rally. Risk sentiment has only improved for the short term.
AUD/USD ranged 0.6650 to 0.68, taking the lead of the EUR. AUD/NZD continued its corrective selloff, to 1.2255, and should rise from here.
EUR’s ascending range was likely spurred by the positive sentiment surrounding the US bank bailouts, as well as short-covering against any further positive bank announcements over the weekend. JPY weakened slightly, to just under 91, which was to be expected on a risk-buying day.
US CPI down 0.7% in Dec. The CPI posted its fifth consecutive fall, pulling the annual rate down from its 5.6% yr peak in July to just 0.1% yr at the end of 2008. Gasoline prices fell 17%, clothing was down 0.9%, auto prices off 0.4% and food prices edged down 0.1%, finally starting to reflect the lower farm prices that have been apparent in the PPI recently. There was also a relatively unusual 0.2% fall in recreation prices and the high-weighted owners’ equivalent rent component was up just 0.1% (a quarter of the whole CPI). The only notable upward pressures were a 0.5% rise in tobacco and a 0.3% rise in medical care. Despite these modest pressures, the core rate posted another rare decline (before rounding; flat after rounding), pulling the annual rate down to 1.8% yr, its lowest since late 2004.
US consumer sentiment edged a little higher this month, from 60.1 to 61.9 (UoM index), mainly due to a little less pessimism regarding the economic outlook. That could be related to president-elect Obama’s planned fiscal stimulus. An uptick in inflation expectation coincides with the renewed rise in gasoline prices over the past couple of weeks, although with oil prices falling again that will likely prove to be temporary.
The US industrial sector continues to shrink rapidly. The 2% decline in Dec industrial production was the second steepest monthly fall in output since 1980 (the steepest being Sep’s hurricane/Boeing strike disrupted 4.2% drop). In fact renewed Boeing activity explained all of a 1.8% jump in business equipment output last month - the only sub-component of IP to post a gain. Autos were especially weak in December, followed by construction materials, reflecting the dire state of those two industries. This result will require us to tweak our Q4 GDP growth forecast a little lower, pointing to an annualised GDP decline of closer to 6% than 5%.
US Nov capital inflows slow. Following October’s massive capital inflow, November saw a more modest TIC flow, and there was continued outflow on the long-term part of the ledger, mostly due to less buying of Treasuries by foreigners and some central bank selling of US$ reserves. This result sits well with the performance of the US dollar in November, which was when its rapid appreciation since July stalled.
The Euroland trade deficit was –€4.9bn in November, the seventh deficit in a row, confirming that despite lower oil import costs, exports are taking such a big hit with trade finance drying up and global trade on the skids.
Outlook
On a quiet Monday (Wellington holiday), a further push to 0.5570 would complete the short-term corrective rally since Thursday. Our expected range today is 0.5400 to 0.5570, with a positive bias.
