News and views
The key event last night was the US Fed’s FOMC meeting, which saw the Fed funds rate left unchanged at 0-0.25%, and was accompanied by a less dovish statement than the market had expected. Given no increase in asset purchases, the US dollar rallied. The S&P500 opened much higher, durable goods orders much better than expected; however, it was downhill after that, and should close +0.5%. The US 5yr treasury auction was very well attended by (probably) foreign bidders, but durable goods and a less-dovish-thanexpected FOMC saw 10yr notes close 7bp higher.
EUR fell throughout the evening sessions, from 1.4140 to the current 1.3890 level. The ECB provided €442bn in 1yr funding to banks, slightly higher than consensus, but far from the €1000bn expected by some. The expectation that some multinational banks may convert the funding into other currencies partly drove the selloff. EUR/CHF posted an impressive rally, from 1.5015 to 1.5380, after the SNB intervened. GBP hovered below 1.66 for a few hours before following EUR down to 1.6370, BoE again talking sterling lower. USD/JPY was relatively stable between 95 and 96.
AUD rallied to 0.8050 during early London following the broader positive start to risk, but the stronger USD eventually dominated to send it to the current 0.7930 level.
NZD also strengthened early London to 0.6490, but is now at 0.6380. Given the volatile tone to the markets yesterday, AUD/NZD was surprisingly stable between 1.2400 and 1.2450.
The US Fed left its funds target unchanged at 0-0.25% following this week’s FOMC meeting. Compared to the April 29 statement, the Fed is more confident that the pace of contraction is slowing, that household spending is stabilising and businesses are working through their excess stocks. However the inflation view was also upgraded by omitting the April risk that “inflation could persist for a time below rates that best foster economic growth”. The FOMC’s anticipation “that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period” was identical to that on April 29 – there was no attempt to massage bond rates lower (and no change to the $1.75trn bond purchase program).
US May durable goods orders posted another 1.8% gain, the first back to back monthly gains in since June-July last year, adding to the body of evidence pointing to a stabilising economy in the not to distant future. Core capital goods orders jumped nearly 5%.
US new home sales fell 0.6% in May and revisions were substantially to the downside, leaving the annualised sales pace around the middle of the 329k to 354k range that has prevailed this year so far. That means sales are bouncing along the bottom, certainly not recovering, but at least no longer in free-fall. There was surprising upward pressure on prices in the May report, a factor which may have tended to weigh against sales.
Japan’s trade balance improved in May. The seasonally adjusted balance came in at ¥222bn in May, up from an upwardly revised ¥82bn in April. The raw number improved from ¥68bn to ¥300bn. Exports are now down 40.9%yr and imports -42.4%yr.
Japan’s corporate services price index fell 3.0%yr in May. That compares to the 2.4% fall in April. Real estate costs are still in positive territory (+0.7%yr) while transportation costs (particularly marine) have fallen spectacularly.
The European Central Bank allotted €442bn to the 1121 banks that bid in today’s unlimited long-term (1 year) financing operation, the biggest ever single day operation conducted by the ECB. With much of the cheap cash unlikely to be used for lending just yet, short rates edged lower and the yield curve steepened, an outcome the ECB will not be uncomfortable with.
UK retail sales steady in June according to the British Retail Consortium.
The OECD revised up its 2009 and 2010 growth forecasts for its member economies from –4.3% and –0.1% in March to –4.1% and 0.7% respectively. That contrasts with downward revisions from the World Bank earlier this month, and was the first forecast upgrade from the OECD for two years.
Outlook
The NZD remains in the wide 0.62 to 0.65multiday range, and below our 0.66 safety level (to be short NZD). Today’s current account report should be slightly NZD supportive.
