News and views
Sentiment turning. A weak US retail sales report was the attributed catalyst for a sharp fall overnight in risky assets and currencies, its importance underlined by retail activity accounting for around 60% of the US economy. The S&P500 closed down 2.7%, further confirming last Thursday’s key reversal signal and suggesting this 2 month rally may have run its course. Copper fell 3.1%, oil -1.4%. US 3mth Libor fell by its routine 2bp to 0.88%, and US 10yr notes improved by 6bp. A Washington Post article said US government regulations will be applied to the derivatives markets soon.
EUR fell from its domestic opening, from 1.3700 to 1.3565, which is minor support from Tuesday. There were conflicting comments from ECB’s Kranjec and Weber – the former saying bond purchases may exceed the stated EUR 60 billion, the latter the opposite. Weber also said one doesn’t comment on colleagues. GBP was hit hard, from 1.5330 to 1.5090, a gloomy BoE report pointing to potential increases in QE. USD/JPY fell a yen to 95.35, some talk of M&A flow around Nikko Cordial noted.
AUD was repelled for the second time this week from 0.7700 resistance, and plunged almost 2 cents to 0.7510. Yesterday’s budget had little market impact, given the key points had been either leaked or expected in the weeks leading up to the release.
NZD’s fall was as dramatic, 0.6085 to 0.5885. The AUD/NZD cross moved to a higher 1.27 to 1.28 range.
US retail sales down 0.4% in April, and given slight downward revisions to history, that was actually pretty much in line with Westpac’s –0.5% forecast. Auto sales rose slightly despite a sharp fall in industry unit sales data (perhaps fleet sales bore the brunt of the collapse, not retail auto sales); but this was offset by gasoline sales which were down despite Dept of Energy data showing prices edging higher since March. Core retailing was subdued, as we expected, falling 0.3% on top of their steeper 1.0% fall in March.
US business inventories down 1.0% in March, reflecting 0.7% lower retail stocks, on top of previously reported declines in factory and wholesale inventories. The decline in total inventories was not as steep as the Commerce Dept assumed when calculating Q1 GDP so there is some scope for an upward revision in this component. Along with net exports and construction spending partials, this should push the advance Q1 –6.1% estimate to closer to –5% annualised.
US import prices jumped 1.6% in April, reflecting the latest upswing in fuel prices, but other import prices were little changed.
Japanese current account widened more than expected in March. The s/adj number (relevant for growth) came in at ¥902bn, up from ¥673bn in Feb. The raw balance (relevant for capital flows) came in at ¥1.49trn, versus expectations of ¥1.21trn.
Euroland industrial production down 2.0% in March, its eleventh month without a gain. Although the scale of monthly output decline has diminished a little since the end of 2008, over the past year output was down by a fifth, its steepest annual contraction on record. For an economy whose core members are driven largely by industrial activity and exports, this is a real and ongoing concern.
The Bank of England quarterly inflation report included a CPI central projection holding below the 2% target for the full three year forecast period (out to 2012), and the tone of comments from Governor King was even more cautious than in February. It sounds like the BoE has a strong easing bias still, but with rates having been cut as far as seems plausible, the Bank is more likely to act on that easing bias by extending its quantitative easing (unsterilised asset purchase) program, rather than by cutting rates further.
Canadian auto sales jumped 6.3% in March, their strongest rise since the start of last year, mainly due to truck/SUV sales. April sales were estimated at “essentially unchanged”.
Outlook
Last night’s equities action supported the view that this 2 month risk rally was becoming stretched, and a correction was due. The speed of decline in NZD last night indicates the fragile nature of recent NZD long positions, and it is hard to see those longs being re-established soon. According, we favour 0.5965 providing a cap today, and a continuation of this move below 0.5900.
