News and views
Risk kept alive. The S&P500 closed 1.5% higher after headline data kept the greenshoots view alive (less so after revisions, though) and US treasuries recovered on bargain hunting by Japanese investors and others. Earlier, the 7 year US treasury auction was less impressive than this week’s earlier 2yr and 5yr auctions, and the yield on 10yrs rose to 3.73%; the ensuing rally took yield back to 3.64%. Commodities oil (+2.0%) and copper (+1.1%), and VIX (-0.7) reflected the mild optimism of the evening.
The Russian central bank governor said the country may sell some US treasuries and buy IMF bonds, and Pimco’s Bill Gross said the dollar would one day lose reserve status, contributing to USD pressure. The US dollar is currently 0.4% lower than 24hrs ago. EUR rallied from 1.3835 to a 1.3985 high overnight, and has consolidated slightly below. GBP tracked sideways in a 1.5880 to 1.6010 range. Japanese investment abroad saw USD/JPY hold its Sydney session gains, remaining stuck around 97.
AUD tried to make a new weekly high after Sydney’s close, but only managed 0.7870.
Free of Standard & Poor’s negative rating outlook, NZD was boosted further during London’s session to reach 0.6275, thereafter ranging down to 0.6200. The NZ rating action largely explains AUD/NZD’s 2 cent fall to 1.2500, but buyers at that technical level took it back to 1.2600.
US durable goods orders up 1.9% in April, but this failed to fully reverse the 2.1% March fall, which was revised 1.3 ppts steeper. In April, there was a 2.7% jump in auto orders (the first this year) but that is not likely to prove sustainable given the Chrysler bankruptcy and GM’s probable nationalisation. A 23.2% jump in defence orders also flattered the bottom line but the core capital goods component posted a second consecutive decline. Shipments and inventories both posted ongoing declines (neither has risen at all yet this year).
US new home sales up 0.3% in April: sales appear to be bouncing along the bottom, supported in part by sharply lower prices (down almost 15% yr). No evidence yet of a rebound however.
A staggering quarter of all US sub-prime mortgages issued are now in default, and more than 14% of them are in foreclosure. Prime mortgage defaults and foreclosures also continue to rise. It remains to be seen whether the Obama plan to prevent foreclosures (where possible) impacts on these figures in coming quarters.
US initial jobless claims fell 13k to 623k, down for the second week running and indeed back below their four week trend again, providing further evidence that the pace of job shedding in the US economy might have passed its peak. However continuing claims kept soaring in the prior week, indicating that once out of work, it is tougher than ever to find another job.
Japan’s April retail sales continue to decline in line with earnings growth. The headline figure fell 2.9%yr, up from a 3.8% rate of decline in March. The large store component is frightfully weak at -6.7% (up from -8.1%). Rumour has it that a gun was fired in the handbag section of Matsuzakaya last month – and it woke the salespeople up.
The Euroland household and business surveys were either steady or modestly improved this month though it was notable that consumer confidence was unchanged compared to the surge in American consumer confidence; also the retail PMI was weaker. A 1k rise in German unemployment for May reflected a distortion caused by the treatment of those without work but undergoing training as not unemployed, combined with seasonal adjustment issues. The underlying story was still one of increased joblessness.
UK May retail report from the CBI showed renewed weakness, confirming that it was most likely Easter and warm weather distortions behind the modest positive net balance of respondents reporting increased sales in April.
Outlook
As the rally in risky assets (such as equities) appears to be decelerating, so too is the rise in NZD. Upward momentum remains intact, but we note the last three peaks (since last Friday) have achieved only marginal highs. Should this portend a correction during the days ahead, 0.6100 should offer decent support. Today, we err on the positive side, and think there’s enough residual optimism engendered by yesterday’s surprise rating “upgrade” to keep NZD elevated.
