News and views
Investors dominate. US equities opened strongly, maintaining those gains to close up 3.2%, with banks up an impressive 18.4%. This despite Standard & Poor’s placing the credit ratings of 23 financial institutions, including Bank of America, Citigroup, and Wells Fargo, on negative watch, and the likelihood that the stress tests will say they need more capital. Sidelined cash appears to be getting itchier, and is jumping on any greenshoots, such as the better than expected US construction spending and home sales reports last night. Oil rose 2.3% and copper gained 2.0%. US funding pressures continue to stabilise, 3mth Libor 1bp lower to 1.01%.
EUR was under pressure during early Europe as the EU revised GDP forecasts for the Eurozone and countries downwards. Comments from Obama proposing to outlaw offshore tax avoidance techniques also saw the USD strengthen, and EUR fell a cent to around 1.3215. It was a different story from the US opening bell, though, and the currency quickly rallied to the 1.3400 area. USD/JPY’s fall was a dampened somewhat by ex-MOF Sakakibara’s comments Japan is in worse shape than the US, and the yen should weaken to 100-110.
AUD followed EUR down from 0.7380 to 0.7315, and then US equities up to 0.7400. AUD/NZD rose from around 1.28 to almost 1.29, stalling at 1.2850.
NZD behaved similarly to AUD, making a 0.5770 high, before consolidating under 0.5750. The lack of follow through on the upside possibly reflecting New Zealand’s narrowing interest rate premium over other countries.
US construction spending rose 0.3% in March, the first gain in six months. The residential component remained weak – new home construction fell 6.6% in March, and has now fallen for three years uninterrupted. However, non-residential construction rose 2.0%, boosting by government spending. The data were stronger than expected, and suggest an upward revision to the preliminary estimate of Q1 GDP.
US pending home sales rose 3.2% in March, stronger than expected and the second gain in a row. Data were mixed regionally, with sales up in the South and West but down in the Northeast and Midwest. Lower prices and an $8k tax credit have attracted first-time buyers, who accounted for 51% of sales. But it remains a buyers’ market: distressed sales made up about 50% of existing home sales, compared to 45% in previous months.
The Fed Senior Loan Officers’ Survey found that banks continue to tighten their lending standards. Compared to the January survey, more lenders tightened standards on residential mortgages, but fewer tightened standards for business and consumer loans. Banks reported that loan demand weakened in almost every category, with the notable exception of prime mortgages.
The EU Commission slashed its growth forecasts for the Eurozone to -4.0% this year and -0.1% next year, broadly in agreement with the IMF and OECD. Unemployment is expected to reach 11.5% next year, and slowing growth and rising social security costs are expected to lift the average fiscal deficit to 6.5% of GDP, with all of the major economies in breach of the 3% limit set out in the Stability and Growth Pact.
Eurozone April manufacturing PMI was revised up from 36.7 to 36.8 on the final estimate. While an improvement from 33.9 in March, it still implies a deep contraction in manufacturing in the first half of this year.
Sentix European investor confidence rose slightly to -34.3 in May, a weaker gain than expected. The current conditions index fell from -55 to -59, while expectations rose from -12 to -5.
German retail sales volumes fell 1.0% in March, much weaker than expected, as rising employment continued to sap consumer confidence. Car sales, not included in the headline figures, fell by 6.5%, following a 14.6% gain in February as the government introduced a ‘cash for clunkers’ incentive to encourage people to buy new cars.
Outlook
The failure of NZD to retest the 0.5620 support level means the balance of probabilities today favours a test of Thursday’s 0.5770 high. Today’s ANZ commodity price report shouldn’t trouble the market, being a composite of already digested information.
