News and views
The rally in risk assets took a breather on Friday night, the S&P500 dropping 2% in the first hour, and remaining there for the session’s duration, as investors took profit and banks admitted March had been a tough month. European equities also fell 2%. Oil dropped 3.6% on equities weakness. US 10yr treasuries weakened by 2bp, possibly suffering from indigestion after a record issuance week. US 3mth Libor fell 1bp, but more interestingly, was the subject rumours the Fed may try to engineer it lower. 1mth treasury bills traded at a negative yield, -0.01%.
NZD followed suit from 0.5750 to 0.5670, bouncing back above 0.57. NZ interest rates calmed down on Friday, after a torrid week, the 5yr swap at 5.00% after the previous day’s almost 50bp spike (see Friday’s Rates Strategy publication for our explanation of the volatility).
AUD tumbled from the domestic session’s 0.70 level, as stop-losses were triggered by model-driven selling initially, to a late-London low of 0.6866, recovering to 0.6950. AUD/NZD was confined to a 1.21 to 1.22 range, currently at 1.2150.
EUR suffered its biggest daily loss since January, 1.3590 to 1.3260, assisted by comments from German Minister Steinbrueck that the EUR is at risk if the EU stability pact is not taken seriously. GBP fell from almost 1.45 to 1.4270, BoE Miles’ caution that UK debt could climb to 70% of GDP adding to the tone. USD/JPY lost ground slightly to 97.85, at one point as low as 97.10.
US March University of Michigan consumer confidence index was revised to 57.3 from the previously estimated 56.6. The index improved slightly relative to February but remained at a dire level consistent with ongoing deep recession. Economic conditions were more pessimistic while the economic outlook was slightly improved.
US core PCE deflator continued its recent rise in February, to 0.24%. Last year’s low core PCE readings were partly due to falling energy prices, and oil is no longer falling. Personal disposable income returned to its negative trend after rising last month on tax cuts and benefit increases. Personal spending increased in nominal terms but fell in inflation-adjusted terms, due to higher petrol prices.
Japan CPI update and Feb retail sales: the inflation and retail updates confirm that price pressures are easing and that spending is weakening as the recession continues. Nationally, core inflation showed that prices were unchanged on a year-ago (as expected) and that for Tokyo, core prices rose by 0.4% over the year, down from 0.6%yr (also as expected). On the retail front, sales contracted by 0.3% in Feb. That saw sales down 5.8%yr, much weaker than the –3.0%yr expected. For large retailers, sales have slumped 8.2%yr.
Germany’s flash CPI estimate for March was weaker than expected at –0.2%. Annual inflation fell to 0.4%, and will soon fall below zero.
European industrial orders fell a further 3.4% in January. Revisions to previous months revealed that factory orders are now down more than a third compared to a year ago. Orders for consumer durables were down 26% yr, although the 1.1% January decline was milder than recent months. Orders for capital goods are now down 40% yr and continued to fall at a nasty 4.4% pace in January.
UK Q4 GDP was revised from –1.5% to –1.6%, in line with our expectation. But construction activity was revised down from –1.1% to –4.9%. Recent data suggest GDP has fallen just as precipitously in Q1 2009.
The UK current account deficit was £7.6bn seasonally adjusted, having failed to shrink as expected in Q4. There was no improvement in the goods balance, despite cheaper oil and reduced imports, because UK exports also collapsed.
Outlook
Given the weak tone from New York’s close, NZD will probably soften further today, towards 0.5650. We are watching for signs of a top in this month-long NZD rally, but don’t expect any until at least tonight’s US equities session. Today’s economic releases, building permits and M3, are typically not market movers.
