News and views
Buying of risk continued. No events of note, rather an expectation this bear market rally continues, witness the fall in fear index VIX to 41. The S&P500 is currently up 1.1%, but we note the banks’ index has diverged, down 3%. European equities were largely unchanged. Oil (+2.5%) and copper (+3.1%) moved on sentiment, but a correlation breakdown was apparent in US treasuries (as has been the case for the past few days), 10yrs rallying by 4bp. The US Fed buys short-dated treasuries tonight under its QE program. Norway’s central bank said it may intervene to stem the NOK’s recent strength, while the ECB said it had not made any decisions regarding asset purchases (implying it had been discussed).
NZD gained another half cent after the NZ close, but gave it back in NY, to open this morning unchanged at 0.5750. NZ swap rates rose and fell 50bp yesterday, in a dramatic session of stop-lossing and re-entering.
AUD had a lacklustre evening, sitting just above the 0.70 level, where it remains this morning. AUD/NZD continued to weaken in Europe, driven by NZ’s interest rates blowout, but found a floor around 1.21, and has recovered partially to 1.22.
EUR was quiet, ranging under 1.36, and then sliding to 1.35 in NY. German consumer confidence data was weak. GBP wasn’t helped by weak data (retail sales) either, falling from 1.4640 to 1.4425. USD/JPY ground higher from around 98 to 98.60.
US Q4 GDP was revised from –6.2% to –6.3% annualised between the preliminary and final releases. The broad compositional story was unchanged – exports, business investment and housing investment all collapsed, consumption fell sharply, and government was the only source of growth in demand. Imports were revised lower (which is positive for GDP). This was offset by a revision that showed inventories were being run down at a faster pace than previously thought. That means fewer inventories to left to clear and perhaps less GDP weakness in Q1. We now think the decline in Q1 GDP may be slightly less severe than 2008 Q4.
US initial jobless claims remained steady at 652k in the week ended 21 March, while continuing claims rose by 122k in the week ended 14 March, similar to recent weeks. The monthly pace of job losses has been steady for some weeks now.
Japan corporate service price index rose 0.2%mth in Feb (the first rise in 9 months) but due to base effects the annual pace fell to –2.6%yr from –2.4%yr in Jan, steepest drop in 7 years. The Feb monthly rise was boosted by a 12% bounce in the ocean ship chartering services component, rebounding following recent sharp declines, in parallel with the Baltic Dry Index of shipping rates.
Germany’s GfK consumer confidence fell to 2.4, the first fall in seven months, in the “April” survey (surveyed in early March).
Euroland money supply growth continued to slow to 5.9% annual in February.
UK retail sales volumes fell 1.9% in Feb, much weaker than expected. This may be payback from two months of relatively strong growth that were based on heavy price discounting. There was noticeably less discounting in February as the low sterling exchange rate and higher petrol prices pushed up retailers’ costs. The snowstorms that brought the UK to a standstill in early Feb also contributed. Note that the discounting itself may have made prices difficult to measure in Dec, exaggerating the volume increase in that month and in turn exaggerating the volume decline this month. Even so, the overall message remains in tact – retail sales are falling fast. We expect further falls in retail sales volumes in the coming months. Yesterday’s survey of retailers suggested March was weaker than February.
Outlook
Yesterday’s dramatic interest rate rise (driven by a flood of stop-losses on speculative positions) meant the small pullback in NZD we expected was bypassed in favour of proceeding to the next leg of this corrective rally. There should be another push beyond 0.58, but interest rates are tumbling back as we write, so a pause between 0.57 and 0.5750 can be expected today. A weaker-than-expected GDP print this morning risks NZD lower. Our multi-month forecast remains sub-0.49.
