News and views
A large commodities rally was the notable feature of Friday’s US session, funds seen short-covering ahead of the Lunar New Year, although it is unclear what the catalyst was. Despite fundamentals remaining poor, and inventories rising, WTI oil rallied 6% near the close. Copper (+5%) and gold (+5%) also posted large gains. Commodity currencies all benefited, particularly the CAD. US equities followed suit, after spending the first half of the session in negative territory, and ended up 0.5%. US treasury yields rose again, the selling attributed to debt supply concerns and a rumour China was reducing its holdings.
NZD was sold early Europe, and made another attempt at the bottom of its four day range, 0.5170. The commodities action then propelled it to near the top end, to 0.5320, before settling slightly lower. Solid fund buying was noted.
AUD/USD’s pattern was much the same, taking a dip to 0.6420 and then rallying to 0.6590 area, before running out of steam. AUD/NZD moved in an approximate range of 1.23 to 1.24, and has lost its upward momentum for now. A downward attempt at 1.23 this week wouldn’t surprise.
EUR’s initial sell-off took it to around 1.2765, the ensuing rally to 1.3035. Funds were seen taking profit on long-USD positions, and China was rumoured to be selling USD against a basket of currencies. JPY repeated Thursday’s pattern and bounced off 88 to rest around the 89 level.
No US data to report.
Japan all-industry index fell a steep 2.5%mth in Nov, -4.5%yr, consistent with the earlier reports showing tertiary index declined 0.9%mth, together with the record 8.5%mth plunge in industrial production. The construction sector revealed a 0.8%mth rise but the level is still down in the year at –1.2%yr.
Euroland PMI factory & services both edge higher in Jan. Not dramatic, but rises nevertheless in the advance PMIs. The composite rose from 38.2 to 38.5. Rate cuts and talk of fiscal stimulus might be helping take the edge off business pessimism in Europe, even though news on the real economy has been exceptionally weak.
UK GDP declined at its fastest quarterly pace since 1980 in Q4. The 1.5% decline was weaker than the 1.2% consensus but just shy of our 1.6% forecast decline. However subsequent revisions in the next two months, as more partial data become available (especially on industrial production) will probably tend to see the growth rate revised even weaker. The limited breakdown showed a 4.6% plunge in quarterly manufacturing output (reflecting the collapse in trade and industrial activity globally last quarter), and lesser but still steep falls of 1.0% in services and 1.1% in construction. Annual GDP growth turned negative for the first time since 1992. Q4 marks the second consecutive quarter of output decline so the UK is now officially in recession, but with Q2 GDP growth flat, we estimate that activity probably peaked around May, so the recession is already about eight months old.
Confusion about UK retail sales in Dec. The Statistician warned that the VAT cut, early discount sales and calendar issues meant that seasonally adjusting the December retail figures was fraught with difficulty. They preferred a focus on the unadjusted annual growth rates, up 1.8% yr in Dec, though that of course makes it harder to assess what actually happened in retailing last month. That said, the slower pace of growth in retail volumes through the year makes December look soft; certainly the previously released private sector surveys from the British Retail Consortium and the Confederation of British Industry were both exceptionally weak in December.
Canadian CPI falls to 1.2% yr in Dec. Plunging energy prices continued to weigh on the headline CPI, but the core rate was unchanged at 2.4% yr as the weaker C$ impact on import prices offset falling auto prices.
Outlook
Today’s domestic session should be lacklustre, given the Auckland and Australia holidays. A data release this afternoon, December credit card transactions, shouldn’t be accorded much importance, since its correlation with retail sales has weakened recently. A range today of 0.52 to 0.5320 should hold, with a downward break on the cards this week.
