News and views
US Fed slightly more upbeat. The US Federal Reserve kept interest rates unchanged, as expected, but their statement noted the pace of economic contraction appeared to be somewhat slower, and the economic outlook had improved modestly. Their statement gave support to those arguing the economy is in a bottoming out phase, boosting risk markets, with the S&P500 gaining 2.0%, and risk aversion barometer VIX falling back 2 to 36. On the other hand, the statement disappointed the US treasury bond market, which was hoping for an expansion of the treasuries buying program, and 10 year notes weakened by 9bp to 3.10%.
The DXY index broke a trendline support line dating from mid December 2008. Rumoured EUR buying by some Asian central banks pushed it up through the 1.3250 technical level, as far as 1.3340, although it fell back a cent near the US close, following the closing consolidation in US equities.
AUD continued its domestic session rally in Europe and NY, moving from 0.7150 to 0.7300, before settling back at short-term support at 0.7250.
NZD’s domestic strength also continued, with an overnight move from 0.5670 to 0.5780, before settling just above 0.5700 support. The RBNZ meeting this morning has the market evenly divided on a 25bp vs 50bp rate cut, so that a reaction either way is likely.
US FOMC left its target range for the Federal Funds rate unchanged at 0-0.25%. The statement sounded a little less downbeat on the economy compared to the March 18 release, noting that “the pace of contraction appears to be somewhat slower”. But the inflation comment was unchanged: “the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.” The Fed’s policy commitment was identical too, with respect to the funds rate “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”, and support for mortgage lending, housing markets, and private credit markets would be maintained as before.
US GDP contracted 6.1% annualised in Q1, roughly the same pace as it did in Q4, disappointing expectations of a slower pace of decline. Consumer spending posted its first gain in three quarters, mainly due to auto sales which levelled off during the quarter after falling sharply through late 2008, and because lower gasoline prices freed up income for spending on other non-durables. But business investment spending was exceptionally weak, down 38% annualised; housing melted down at its fastest pace yet in this downturn (–38% ann’lsd). Another source of spending weakness was the government sector which posted its first quarterly fall for several years. Altogether spending in the economy contracted 5.1% annualised in Q1. On top of that, inventory rundown lopped another 2.7 ppts off GDP, but that was partially offset by a 2.0 ppt contribution from net exports.
Euroland confidence surveys turn a little higher in April. The same day that the German government revised down its official forecast for GDP growth in 2009 from –2.25% to –6.0% (!!), we see the first upswing in Europe-wide business, retailer and consumer confidence surveys. We suspect these surveys have found a premature wind-back in respondent pessimism, and would expect to see renewed weakness in confidence in the months ahead. Also, Euroland money supply growth decelerated rapidly in March and loans to the private sector saw their growth rate ease from 4.3% yr to 3.2% yr. This indicator still garners respect at the European Central Bank and this sharply slower growth rate will add to the case for further ECB action.
Outlook
While our official forecast is for the OCR to be cut by 50bp this morning, which would see NZD fall in line with our core view, we accept there is also a good case for a 25bp cut, which would have the converse effect. Today’s RBNZ announcement is one of the toughest to predict during this easing cycle.
