News and views
Market tone was mixed last night, supported by positive earnings reports, but weighed by negative economic data. Bank stocks performed (e.g. Amex’s result), and led the indices higher, but the S&P500 later faded on a record-low US consumer confidence release, and is up only 0.8% as we write. Euro-zone and UK equities closed largely unchanged. Commodities prices fell sharply in response to the weak economic data and rising inventories (aluminium stockpiles at record highs), WTI oil down 6% to $43, and copper 6% lower. A successful US treasuries auction calmed fears of waning appetite amid increasing supply, and 10 year yields fell 12bp.
NZD continued its sideways range for the sixth day, needing an event to force a breakout. It looked at the topside, around 0.5350, following EUR’s rally, and later on the retreat, to 0.5250.
AUD’s rise during Europe’s morning had more conviction behind it, reaching almost 0.6720, before pulling back for a rest at 0.6630. This outperformance saw the AUD/ NZD cross establish itself clearly in a higher range of 1.2450 to 1.26.
EUR rallied after the better-than-expected German IFO release, to.1.3330, later dampened by weaker US data, to 1.3120. The GBP continued to claw back last week’s large losses, nudging higher to 1.42. USD/JPY fell from 90 to 88.50, likely pushed by option-related flow from the same player who built the large position which expired last week.
US consumer confidence slipped to a new low of 37.7 in January, despite a slightly less pessimistic view of the labour market (and in contrast to the rise in the preliminary Uni of Michigan sentiment series). The consumer assessment of business conditions was quite a bit weaker. Inflation expectations for the next year continued to drift lower, but remained very high at 5.6%. In related news, the weekly retail data showed a 1.8% fall in chain store sales and a 2.6% fall in Redbook sales, both suggestive of a slumping consumer.
The Richmond Fed factory index rose to -49 in January, in line with the other regional Fed surveys that have been a little less negative this month. The jobs measure remained weak at -40. There were more stark improvements in the services and especially retail surveys, though these don’t often provide reliable guidance to the national indicators of those sectors.
The S&P/Case Shiller house price index recorded another sharp drop in November, down 2.2%. The 18.2% annual pace of decline was little changed from October, given that prices were falling at the same monthly pace a year ago.
Japanese government ready to inject capital into the economy. Japan has announced that they will provide public funds to all firms whose capital has been seriously hurt by the financial crisis. The funds will be offered via a government affiliated bank, and the firms will be required to be profitable within three years. Japan has stated that it will inject funds by buying shares and is not ruling out any sectors in the new funding assistance plan.
German IFO business confidence rose slightly to 83.0 in January, its first rise since May 2008. Further pessimism about the current situation was offset by higher expectations, probably due to hopes that rate cuts and fiscal stimulus will help the economy later this year.
UK retailers reported another very weak sales month in January, though not as soft as late last year, with the CBI distributive trades survey rising from -55 to -47. Even so, readings at these levels imply a much weaker retailing picture than that reported in the official monthly retail sales figures, which have lost some credibility of late.
Outlook
Repeating the mantra of the past few days, a breakout from this sideways range is imminent, and the catalyst for that should come from two announcements: today’s Fonterra payout, and tomorrow’s OCR cut. For today, we’ll opt for a 0.5250 to 0.5350 range, with the direction of any break dictated by whether Fonterra’s number is higher or lower than $5.50.
