News and views
Risk-aversion took a back seat on Thursday and Friday on market hopes that the US Congress would pass the US$900 billion stimulus package and bank rescue plan this week. The worst US payrolls report ever only served to increase the likelihood such measures would be implemented. Global stimulus is expected to take traction soon, and money which has been parked in safe havens is starting to be put to work. The S&P500 index duly rose 2.7%, led by a 13.8% rise in the banks’ sub-index. Copper rose 9%, and Baltic Shipping 10%, signs that economic activity is expected to bounce soon. Interest rate markets are now considering the possibility that easing cycles are almost complete, US 10 year treasuries selling off by 8bp to 2.99% (and steepening the 2-10 year curve to 300bp), while Australian 3 year swap rates rose 25bp.
The increase in risk appetite helped NZD rally over 3.5 cents since Thursday’s NZ close, to 0.5365. Note that the thinner liquidity during Friday’s NZ national holiday may have exaggerated the move. Stimulus packages have consistently provided short-term boosts to risk-currencies, and this week’s speculation surrounding the US plans should do likewise.
After the Australian close, the AUD accelerated from 0.6520 to 0.68, in the wake of an earlier RBA report implying the big rate cuts are over. Recent strength in commodities and shipping is another factor here. AUD/NZD stabilised in a higher 1.2650 to 1.2750 range, the divergent central bank views providing a positive tone.
EUR led the charge in risk currencies, moving from 1.2750 to almost 1.30, a large EUR/JPY order from an auto-maker helping. ECB signals it may cut 50bp in March dominated weak German data and fears of Russian credits impairing European bank assets. Thursday’s BoE rate cut of 50bp to 1.00% lingered, helping GBP from 1.46 to 1.48. With IMM JPY longs at very high levels, USD/JPY was waiting to be squeezed higher, from 90.75 to 92.20. JPY volatility has fallen in the past week, making carry trades more attractive.
US payrolls dive 598k in Jan, and with annual benchmarking revisions unflattering to late 2008 data, it is now the case that jobs are being shed at near a 600k pace in the past few months, whereas prior to this report it was “only” half a million a month. The separate household survey found a staggering 1.2 million job losses in Jan alone, enough to push the jobless rate up to 7.6%, its highest since 1992. However it’s not quite that bad; annual statistical tweaks to the household survey boosted that Jan decline by around 400k leaving a still huge but genuine 800k job loss in place. The Nov to Jan payrolls slump of 1.77mn is unprecedented in the modern era, surpassed only by the 1.97mn soldiers who lost their jobs after the war in late 1945. There were no redeeming features in the report. The job losses were broad-based across most industries. Hourly earnings growth slowed to 0.3% which indicates that it is not just lower-paid workers losing their jobs; for earnings to slow like that, higher paid workers must also be lugging bin-bags of personal possessions home. Hours worked fell a further 0.7%, their fifth straight decline and an early sign that Q1 GDP growth should at least match Q4’s “once in a generation” pace of decline.
German IP down 4.6% in Dec. Yet more evidence that the global trade melt-down in Q4 last year is really hitting the German factory sector hard. The December IP fall was the steepest ever recorded for the current series which began in 1991 after the East-West reunification.
More weak UK data from the industrial sector. Producer price inflation kept or resumed falling in January, depending on the measure, with the diving pound in recent months not yet significant enough to offset the impact of plunging materials costs and weak demand. Industrial output fell sharply again, though not quite as steeply as in November, which was revised weaker. There are grounds now to expect a downward revision to Q4 GDP growth, originally reported at –1.5%. Annual IP growth of –9.4% yr is the weakest since 1981.
Canada posted its biggest ever monthly job loss of 129k in Jan since the series began in 1976. There was across the board weakness, with full-time workers, and manufacturing hit especially hard (perhaps exaggerated by temporary autoplant shut-downs).
Outlook
Given a light data calendar until Friday’s retail sales, the NZD is at the mercy of offshore events. Risk is back, for now, and domestic players will need to adjust positions after holidaying on Friday, which will support NZD on the day. A range of 0.52 to 0.5370 is suggested, with risk to the upside.
