News and views
The bounce in risk appetite stalled last night as investors reassessed the US Government’s latest version of the bank rescue plan. There was much Treasury speak, containing little new information. The S&P500 faltered just above the key 800 level, losing 2% on the day, but the sustained breach of 800 does point to the optimism continuing in the short term. The USD index gained around 0.6%, from a growing view that the Fed’s treasuries purchases would not undermine the USD as much as feared. US 10 year treasuries weakened by 5bp on expectations of further equities strength. Commodities were mixed, copper falling 2.6%, but gold also weakening 1.5%, reflecting the uncertainty surrounding the duration of the current optimism.
NZD fell last night from the 0.5750 NZ high, and is trying to find a base around 0.56. The move was driven by a preference for USD during an uncertain evening session.
AUD spent the evening drifting off the domestic session’s 0.71 high, pausing for now at 0.6950. AUD/NZD ranged higher, between 1.232-0 and 1.2410.
EUR fell from 1.3680 to 1.3430, many stops triggered along the way. GBP was supported by stronger than expected CPI data and central bank comments of expected GBP strength, and fluctuated in a higher 1.46 to 1.48 range. USD/JPY was stable along the 98 level.
US March Richmond Fed Index unexpectedly jumped from –51 to –20, a level not seen since Lehman Brothers collapsed. New orders, shipments and employment all improved dramatically, with new orders the biggest mover. The survey suggests the March ISM will improve relative to February.
US FHFA house prices increased 1.7% in January, which is far larger than any onemonth gain during the house price boom, or ever. We, and markets, were expecting something more like –0.9%, as payback for December’s 0.1% increase (subsequently revised to –0.2).
BoJ February meeting minutes reveal a discussion debt purchases. Having already trimmed the target interest rate to near zero (0.1% since December), the BoJ along with other central banks has turned to non-traditional tools to counter the recession. At the February meeting, the central bank said it would buy as much as ¥1tn in bonds rated A or higher, adding to the plan to buy as much as ¥3tn in commercial paper.
Euroland March manufacturing PMI improved slightly to 34.0, fractionally up on February’s cycle low. European economic activity clearly continued to contact apace in March, further evidence that Q1 GDP could be at least as bad as Q4 2008. The services PMI was up to 40.1 from 39.2.
Euroland current account deficit widened to €12.7bn in January as slumping exports outweighed declining imports of goods.
UK annual inflation increased from 3.0% to 3.2% in February, much stronger than anticipated. Monthly CPI was up 0.9% against expectations of a 0.3% increase. Food prices partially contributed to the surprise, but core inflation was also lofty at 0.7% m/m and 1.6% y/y. The depressed sterling exchange rate has driven up the price of imports more quickly than expected. There may also have been an element of payback from deep discounting over December and January, which has since tailed off. However, CPI has been very volatile lately, so it pays not to read too much into a single month of data, which could just as easily unwind next month. Annual retail price inflation was zero. Many contracts and wage negotiations are based on this measure, which should have a downward influence on future core CPI inflation.
UK mortgage approvals for February were 28.2k, well up from January’s 24.3k but below the 60k+ level of the boom-time.
Outlook
This NZD rally finally fizzled at 0.5750 yesterday, slightly above our 0.57 initial target, but we expect 0.5550 to provide support today for this pullback. This afternoon’s consumer confidence report, and current account and GDP data later this week, are more likely to drag NZD lower still, with a chance of 0.53 seen by Friday.
