News and views
Risk was bought for the third consecutive day, driven mainly by stronger equities. The S&P500 is up 4%, after GE was downgraded by only one notch to AA- with a stable outlook (the market was expecting worse), and US retail trade data was stronger than expected. US bank equities again outperformed, up 12%. Oil rose 9% on the US data, as well as this weekend’s OPEC meeting, copper up 2%. US 10 year treasuries’ correlation with risk broke down, the 2bp rally driven by strong demand in the 30 year auction. Switzerland became the centre of attention, cutting its policy rate 25bp to 0.25%, but more importantly saying it would it would stem the CHF’s appreciation and start quantitative easing by buying local corporate bonds. Late NY, an SEC spokesman said they had no intention of suspending m-t-m accounting.
NZD ranged between 0.5070 and 0.5150 overnight, before a NY rally took it to 0.5220. The RBNZ smaller-than-expected 50bp cut yesterday spooked many out of short-NZD trades.
AUD churned between 0.64 and 0.65 throughout the night, but punched through the top late NY to 0.6545. Post-RBNZ weakness, as well as a weak employment report, saw AUD/NZD move progressively lower to 1.2515.
EUR churned between 1.2730 and 1.2850, before the NY break took it to above 1.29, SNB intervention, selling CHF/EUR, outweighing awful German IP numbers. That action, plus the announcements above, produced an astounding 1.16 to 1.1965 rally in USD/ CHF in less than an hour, before drifting back to 1.1850. USD/JPY rebounded from 96 to 98.
US Feb retail sales were stronger than expected at –0.1%, especially considering that January was revised from 1.0% to 1.8%. The slight decline in total sales was led by a 4.3% decline in auto sales. Ex auto & gas sales were up 0.7% after a 1.4% gain in January. This rise may reflect pent-up demand from purchases delayed during the worst panic months of October to December last year. Still, even with this two-month bounce, the level of core retail sales remains 4.2% lower than last August.
US business inventories fell a further 1.1% in January, with manufacturers, wholesalers and retailers all reducing inventories. Inventory liquidation will remain a drag on GDP for some time to come.
US Initial jobless claims rose 9k to 654k, the sixth consecutive week above 600k. With initial claims steady at such a high level, continuing claims continued to roar upwards to 5.3m.
Japan 2nd prelim Q4 GDP -3.2%qtr (-12.1% saar), little revised from the 1st prelim -3.3%qtr. As expected, it was still the steepest q/q contraction in GDP since the oil price shock of 1974, a severe worsening in the recession. The composition was little-changed, with private consumption -0.4%qtr (unrevised from 1st prelim) and non-residential fixed investment -5.4%qtr (revised slightly from 1st prelim -5.3%).
German industrial production fell an astounding 7.5% in Jan. The German economic situation is clearly worse than the catastrophe we previously believed it to be. Industrial production has fallen by 19.5% in five months, reversing five years of growth. German industry has not experienced anything like this in modern history. By comparison, the early-1990s combination of global recession and structural adjustment following reunification resulted in a peak-to-trough industrial production decline of 12% over 19 months. Brace for shocking employment and retail spending outcomes in Europe.
Euroland PPI surprised by falling 0.8% in Jan. Previous months were revised lower, bringing annual PPI to -0.5%, the first negative print. European PPIs have been depressed by falling energy prices and are likely to return to positive territory over the coming months.
Outlook
This corrective rally is now into its fourth day, and is at risk of a move higher, possibly to 0.5350. We changed our bias from negative-NZD to neutral, following yesterday’s RBNZ move, and will watch for signs of exhaustion in this rally before re-establishing our sell-NZD recommendation. This morning’s retail sales report is a potential marketmover.
