News and views
Sentiment boosted by data. Factory (ISM) and home sales data was taken by some as pointing to an impending base in economic decline, slightly boosting investor optimism, and helping the S&P500 rally after a shaky start (GM bankruptcy worries). The index is currently up 1.8%. Earlier, the Eurostoxx closed up 2.2%. Commodities were little changed, except for oil, which fell 2.5% on a surprise jump in inventories. US 10 year treasuries rallied by 1bp, extrapolating the weak ADP private jobs data to Friday’s important payrolls report. Currencies were generally cautious ahead of outcomes from the G20 and ECB meetings this week, the latter being watched for QE signals.
NZD continued to weaken at Europe’s open, on yesterday’s RBNZ’s important verbal intervention, to 0.5530. A short squeeze then took it to 0.5640, where it sat until opening the NZ session this morning with a surge to 0.5695. Fonterra’s milk powder auction last night saw average prices up 3.5% from the previous month.
AUD drifted slightly higher overnight, to 0.6950, remaining below yesterday’s high. AUD/NZD struggled to hold onto yesterday’s gains to 1.2440, slipping all session to the current 1.2280 low.
EUR ranged sideways between 1.3170 and 1.3290, despite the PMI and unemployment data being weak. GBP rallied from 1.4270 to 1.4420, stronger UK PMI helping. USD/JPY did nothing, locked in a 98.40 to 99.15 range.
US March ADP employment fell 742k, substantially more job losses than expected. The ADP survey has become a better predictor of official non-farm payrolls (due on Friday) since methodology changes were made a few months ago. ADP has tended to overstate job losses slightly, so we have changed our forecast for non-farm payrolls to -700k (previously -630k). US March ISM rose to 36.3 from 35.8, confirming the sense that March has seen less of a production decline than recent months (but a decline nonetheless). New orders rose sharply from 33.1 to 41.2. Employment intentions remained extremely low but defied other surveys by not falling further from last month. US February construction spending fell 0.9%. Residential construction spending was down 4.1%, but the total figure was buoyed by both private and public non-residential construction. The February rise in housing starts and building permits suggests the long slide in residential construction spending may soon end, although there may be further to fall for private non-residential spending. US February pending home sales rose 2.1% after a 7.7% decline last month. This rounds out the first positive month in a very long time for America’s moribund housing market.
Eurozone March PMI was steady at 33.9, having changed little since December. The latest official statistics showed that European industrial production fell 4% in January. This PMI suggests a similar dizzying pace of contraction has persisted right through to March, in contrast to the US and UK where March may have been less severe. Eurozone Feb unemployment increased to 8.5% from 8.2%. Markets were expecting a more modest 8.3%. Rapidly rising European unemployment could generate a new leg down in global final demand.
UK March PMI leaped to 39.1, its highest since October last year, suggesting some moderation some in the pace of contraction in manufacturing. UK December quarter mortgage equity withdrawal fell to -£8.0bn, the largest equity injection in the history of the series (1970) and exceeding the 1995 lows. Indeed, data last week show that new mortgage borrowing now barely exceeds repayments. The days of financing consumption by borrowing against rising home prices are over.
Outlook:
The NZD’s surge from last night’s 0.5530 low is impressive, but it should find resistance around 0.5730 today. The NZD is still at the mercy of global sentiment, mirroring moves in the S&P500 during the past few sessions. Longer term, we believe the fall in NZ interest rates, which the RBNZ has expressed a desire for (and can control to some extent), will remove yield support for the NZD and see it weaken in turn.
