News and views
Risk-aversion dipped slightly last night, but broadly remains in a consolidative phase. Global equity indices were unchanged, on average, but bank stocks continued to be sold (-4%), providing a clue regarding the next move in risk. Europe was again in the spotlight - press conference comments from Germany’s Merkel engendering little market confidence that any Euro-zone recovery is afoot, and the Bundesbank reiterating Germany is in severe recession. UK PM Brown said G20 will look at helping Eastern Europe, in a nod to that zone’s impact on the UK and Euro-zone banking sector. Inventory reports drove oil again, up 11% to $38, while copper ignored the growing stockpile data, bouncing 2%. Looming supply remains the main driver in the US treasuries market, the 10 year note weakening 6bp to 2.82%.
NZD followed EUR higher, to 0.5190, but ran out of steam and flopped to 0.51, where it hovers. AUD’s euro-inspired rally reached 0.6520 before resting around 0.6450. AUD/NZD performed to the top of the recent broad range just above 1.26, but shows no signs of sustaining a breakout yet.
EUR rose to 1.2760 on stimulus hopes, but faded to 1.2670 on a lack of specifics from Merkel, and ECB comments (Bini Smaghi) that the zone shouldn’t use currency weakness to gain economic advantage. The ECB comments had the opposite effect on GBP, pushing it to 1.4450, but it too could not hold on and sits back at 1.4303. The Japanese Government’s downgrade (for the fifth month in a row) drove USD/JPY higher still, now at 94.40.
US Philly Fed slumped from –24 to –41 in Feb, more than reversing its twomonth upswing around the turn of the year. Orders, shipments and especially jobs were all weaker, pointing to a severe contraction in factory activity in the northeast.
US PPI surprised to the upside last month, rising 0.8%, though given that January is the month many firms make annual adjustments to prices, there may be a seasonality issue at play. Excluding food and fuel, the core PPI rose 0.4%. Intermediate and crude prices continued to fall, but less rapidly than in late 2008. Overall, a stronger than expected measure of factory gate prices at the start of the year, but not enough to alter our view that the US economy is entering a significant period of disinflation.
US leading index posted a second consecutive gain in January, up 0.4%, due mostly to the money supply component which added 0.5 ppts and interest rates which added 0.2 ppts. These recent positives are telling us that the outlook should be improving - that is, if the economy were to respond “normally” to lower interest rates and expanding money supply. But it clearly isn’t.
Initial jobless claims held steady at 627k last week, which coincided with the non-farm payrolls survey week for February. In the same week in January, claims were at 585k. The 4 week moving average for claims rose from 518k to 619k over the same period. Add in the slumping regional business survey jobs picture, and the surge in continuing claims in the prior week, and the case can be made for a payrolls loss of closer to 700k per month than 600k per month.
UK money supply M4 expanded at a 17.5% yr pace in January, up from 16.2% yr in December, most likely due to the liquidation of riskier assets outside the M4 definition into cash or deposits captured by M4. Also, the accrued public sector net credit requirement as at the year to January was £20.1bn, up from £8.5bn in the same period last year, neatly illustrating the rapidly deteriorating state of the UK public accounts.
Outlook
No change to our view that the NZD is consolidating in a sideways range, except that the range is now slightly wider than yesterday, at 0.5060 to 0.5180. The next move is expected to be a break down towards strong 0.50 support.
