News and views
FOMC minutes spoil equities party. After posting a 1.7% rally from the opening bell, the S&P500 reacted to the US Fed’s minutes showing downward revisions to GDP for 2009 and 2010, and is currently up 1.2%. Initial optimism arose from the US Treasury’s suggestion it may include life insurance companies in its Troubled Asset Relief Program, and a positive surprise earnings report from Bed Bath & Beyond, the largest US home furnishings retailer. Oil rallied 1.8% on dwindling stockpiles, but most other commodities were materially unchanged. US 10 year treasuries rallied by 4bp on the FOMC. Fitch cut the sovereign credit ratings for Ireland, Latvia, Lithuania, and Estonia, while Moody’s downgraded Mizuho Bank to Aa3.
NZD bottomed at 0.5690, followed by a higher 0.5750 to 0.5800 range, influenced by US equities mildly positive mood. QV housing data last night showed prices continue to fall - nothing new to surprise markets.
AUD rallied from 0.7035 to 0.7130 last night, before continuing to gyrate around the 0.71 level. AUD/NZD drifted lower, from 1.2360 to the current 1.2260. The employment report today will be watched for signs economic weakness has finally caught up with the labour market.
EUR rallied from 1.3150 to 1.3310, buoyed by improved German trade figures, a weak factory order report slowing the rally. GBP was quiet, again stuck around the 1.47 level. USD/JPY continued tracing a downward zig-zag pattern to 99.75. Volumes in most currency markets was reported to be light ahead of the Easter weekend.
US wholesale inventories fell 1.5% in Feb, while sales rose 0.6% and the inventory/ sales ratio fell slightly. All this indicates that wholesalers have reduced their orders to a level below sales, sufficient to begin clearing the stockpiles that built up last year. Inventory divestment will be a big detractor from Q1 GDP, but with the inventory cycle working through, some recovery in production is within sight.
The minutes of the 18 March FOMC meeting showed that members saw downside risks to an already-weak economic outlook, with fears of a negative feedback loop between spending, jobs and credit. They noted that the expansion of the Fed’s balance sheet and the extent of demand for bank liquidity was a sign that credit markets were still not functioning well. The vote to buy $1.15 trillion of government and mortgagebacked bonds was unanimous.
Japan’s current account rebounded to +¥1,117bn in Feb, following what was the first deficit in 13 years. Most of the swing reflected seasonal factors with the seasonally adjusted series revealing a smaller ¥673bn surplus following a ¥258bn in Jan. Feb included the trade balance swinging to a ¥202bn surplus from a deficit of ¥844bn, in line with the merchandise trade data. However, this is not a positive story as exports are down –50.4%yr on the global downturn.
Germany’s Feb trade balance rose to €8.7bn from €7.0bn. Exports fell only 0.7% while imports plunged 4.2%. However, in January exports were revised to a 7.4% fall, so we put this down to monthly volatility rather than a new trend. Germany’s trade surplus remains small by historical standards.
German factory orders fell 3.5% in Feb, and are now down 38% compared to a year ago. Domestic orders fell more sharply than foreign orders, which were previously the main source of weakness.
UK Nationwide consumer confidence fell to 41 from 43, equalling the low set in Jan.
UK NIESR GDP estimate for the March quarter was –1.5%. This GDP estimate has tended to err slightly on the positive side of the actual outturn.
Canadian housing starts rose to 155k from 135k, against an expected fall. Starts are 35% lower than a year ago.
Outlook
The 0.58 level has provided good resistance for the past two sessions, and it is being tested again as we write. Should it hold, we look for the slide in NZD from 0.5980 to continue to at least 0.56. Should it break, a move higher to 0.5870 should ensue. We attach a slightly higher probability to the former. The Australian employment report will be key later today.
