News and views
The squeeze. Long-risk positions across asset classes were squeezed last night on only mildly weak US data and some USD supportive comments, perhaps indicating expectations for growth had become stretched. China's central bank calling its US treasuries holdings a 'partnership', and Japan, India, and Korea officials saying a US downgrade would have little impact on reserve policy, were bullish dollars, particularly in a market which had been short since March. Bernanke's testimony revealed little new, but his attention to the fiscal balance was USD and treasuries supportive. US 10yr notes rallied around 7bp. The S&P500 fell at the NY open, but a flurry of bargain-hunting ensued to leave the index -1.4%.
EUR has one of the milder falls last night, starting its fall around the Sydney close, from 1.4340 to 1.4110. GBP, previously outperforming EUR on the upside, slipped further, 1.6660 to 1.6240. JPY was a pillar of stability, ranging sideways between 95.60 and 96.40.
AUD closed in Sydney at its high of 0.8265, but then commenced a long uninterrupted descent to 0.7935, ending the NY session with a key day reversal signal established. Terry McCrann wrote the Australian economy is not as rosy as yesterday's headline GDP suggested.
Previous market darling NZD fared worst, falling from 0.6540 to 0.6270; it was already under a cloud during the NZ session, the weak Fonterra auction and Fitch's review of NZ's rating weighing. AUD/NZD pushed to a higher range of 1.2600 to 1.2700 as a result.
US ISM non-factory index edges up from 43.7 to 44.0 in May. The services and construction ISM composite headline was little changed in May, and the main activity sub-component (which used to be the headline) was the weakest in three months. Orders also showed moderate slippage although jobs rose 2 pts, indicating a slightly less steep pace of job shedding. But overall, this ISM survey failed to reflect the mostly improved nature of the swathe of other business surveys already published for May.
US ADP private payrolls estimate down 532k in May, a similar pace of job loss as in April. The ADP estimate has tended to swing around a bit more than the official measure of private payrolls recently - for example, in March to April it improved by 191k whereas the BLS estimate was only 82k improved. Nevertheless it has tended to pick the direction of the subsequent (private) payrolls outcome, so this result suggests that our forecast of a smaller payrolls decline in May than in April is reasonable. We expect total payrolls to fall -520k vs -539k in April. Also hinting at a less severe pace of job loss, the number of corporate layoff announcements was the lowest since September last year (not seasonally adjusted) in May, but up 7.2% yr on a year ago.
US factory orders up data were not impressive with a 1.0 ppt downward revision to March offsetting April's 0.7% gain. Putting the two months together, durables, non-durables, shipments and inventories all were weaker than in February.
Fed chairman Ben Bernanke testified before the House Budget Committee. The tone of his comments on the economy was little changed from his previous testimony to the Joint Economic Committee on May 5.
Euroland Q1 GDP "growth" was confirmed at -2.5%, unrevised from the flash estimate of a few weeks back. Household consumption was down 0.5%, investment spending fell 4.2%, public spending was flat, imports fell 7.2% and exports were down 8.1%.
The UK services PMI rose back above 50 in May (51.7) for the first month since April last year, which suggests that in the middle of the second quarter, services sector activity actually expanded modestly.
Outlook
NZD accelerated upwards from last Friday, and fell abruptly last night, indicating those recent long positions have been cleared out. There's no sign this was a medium term top, but the AUD has formed a key day reversal pattern, signalling a top in that currency. As a consequence, we will, in the sessions ahead, watch for confirmation NZD has turned. Today's tone should remain weak, the Fitch sovereign rating report due sometime next week.
