News and views
No follow through buying. US Treasury Secretary Geithner helped set the tone for the NY open, saying the financial system was starting to heal. The S&P500 gained 1.8% in the first hour, only to slide from there to close -0.5% (a minor key reversal day), as the Fed revised its 09 and 10 growth forecasts downwards, unemployment higher, and the FOMC minutes noted some members open to expanding the balance sheet even further. There was no hint the Fed is even close to contemplating an exit strategy, and this helped US 10 notes rally by 6bp. US 3mth Libor marched on, down another 3.6bp to 0.716%. Oil at 3.1% higher outperformed most major commodities.
The USD was broadly weaker, the dollar index losing 1.3% since yesterday, as suspicions regarding potentially more USD-debasing QE were supported by the FOMC minutes. EUR made another leg up from around 1.3600 to 1.3830. GBP rose from 1.5475 to almost 1.5800. The BoE minutes showed a unanimous vote to increase the size of QE, with some members favouring even more stimulus, noting a slow recovery was expected. USD/JPY fell from 96.00 to 94.85.
Support at 0.7700 held well for AUD, which made a new 2009 high at 0.7810 around midday London. The NZD was initially well supported at 0.5990, later making a high at 0.6115. AUD/ NZD drifted lower within the 3 day old 1.2750 to 1.2900 range for most of the evening session, but has rebounded to 1.2800 during the past few hours.
US FOMC minutes were more downbeat than the 29 April statement and recent Fedspeak would suggest. Committee members noted some tentative signs of improvement, but still forecast a deeper recession in 2009 and a softer recovery in 2010 compared to the previous meeting, with unemployment expected to reach 9% or higher through 2010. Some members felt that it may be necessary to expand the Fed’s asset purchases in order to secure a recovery.
Treasury Secretary Geithner said that the work to stabilise markets was “not yet completed” but that there were important signs markets were “starting to heal”.
Japanese Q1 GDP abysmal at -4.0%qtr. The headline was not far from expectations, although the composition was a little surprising. Business investment was horrendously weak at -10.4% in the quarter following a -4.4% and a -6.7% in the two prior readings. Inventories swung viciously from a 0.4ppt contribution to a 0.2ppt detraction, consistent with the sharp drop in manufacturing inventories observed in the quarter. Import volumes again outperformed exports by a wide margin, falling around 15% in the quarter vs a 26% decline in exports. Dwelling investment reversed its Q4 gain with a 5.4% decline. We expect the Japanese economy to contract by 7% in 2009, which would subtract 0.4ppt from world growth.
German producer prices down 2.7% yr in April. That is the steepest annual pace of decline since 1987, and reflected a 1.4% drop in the month, mainly due to energy, as well as favourable base effects.
Bank of England minutes show 9:0 vote. The May policy meeting decisions to hold the bank rate at 0.5% and to extend quantitative easing by a further £50bn and two months were unanimous, with some members favouring a more generous QE program. Indeed “the risks of stimulating demand too little at the current time seemed greater than the risks of stimulating it too much”. On a sad note, the May meeting was David Blanchflower’s last; his term on the MPC was not renewed and the committee will be the poorer without him.
UK CBI industrial trends survey weak again in May. The key orders index was essentially unchanged at –56, its fourth consecutive month in the –56 to –58 range. However the expected outlook index improved from –32 to –17.
Canadian CPI falls from 1.2% yr to 0.4% yr in Apr. This was mainly due to favourable base effects, with last year’s energy price rises dropping out of the annual calculation. The Bank of Canada’s core rate edged down from 2.0% yr to 1.8% yr. In other news, the leading index for April fell 1.1%, its fifth consecutive decline of 1% or more and its eight consecutive fall in all. That points to a depressed economy in 2009 and even heading into 2010.
Outlook
An upside break of the technically key 0.6130 level points to a significant move higher in NZD. Until then, however, we can’t get too bullish, and suggest the kiwi will range trade during our day between 0.6000 and 0.6100, with a slight downward bias given the weak S&P500 close. Today’s immigration report should show an increase in expatriates returning home, potentially a small positive for NZD. The credit card numbers are unlikely to add anything new to the earlier electronic transactions report.
