News and views
July’s US consumer confidence reading was lower than expected, maintaining pressure on risk assets. The S&P500 closed down 0.4% after a mid-session recovery, and sits stubbornly at a key support level. Financials fared worse, -1.6%, ahead of this week’s earnings reports, and Chevron’s quarterly warning hurt the energy sector. President Obama said it was premature to begin unwinding stimulus, and recovery was “a ways off”. US 10yr treasuries gained by 10bp, and 3mth Libor slipped 0.5bp to 0.505%. Oil was 0.9% lower, copper -1.1%. Baltic dry shipping costs fell 1.1%, bringing the total decline since 3 June to 29%.
US dollar was slightly stronger on the selloff in risk, a report the US trade deficit in May shrank more than expected, and IMM weekly data showing the largest shortdollar position since July-08. EUR dipped to 1.3880, but recovered to around 1.3950, unchanged since the Sydney close. GBP fell from 1.6270 to 1.6155, currently just above 1.6200. USD/JPY fell to a recent support level at 91.80, consolidating around 92.50.
AUD lost half a cent from 0.78 during the London session, but bounced back during NY.
NZD hit a 0.6235 low, but returned to the 0.6275 area. AUD/NZD continued to range just above 1.24, having dipped to 1.2345 briefly.
US UoM consumer sentiment down 6.2 pts to 64.6 in July. Consumer sentiment fell more steeply than we expected in the early July UoM report, but the result was nevertheless consistent with other confidence surveys which pointed to deteriorating confidence over the last few weeks. Rising gasoline prices, falling equity markets and job market deterioration are the most obvious factors at play, although shorter term inflation expectations eased slightly.
US trade deficit narrowed sharply again in May, to $26bn, reflecting an unexpected fall in imports, mainly due to a sharp fall in oil import volumes (imports rose 0.1% ex petroleum), and a 1.6% rise in exports, their strongest performance for the year so far, led by a near 10% jump in industrial supplies. Because the narrower deficit was volumerather than price-driven, the real deficit narrowed by 10%, which points to a solid contribution to Q2 GDP growth from net exports. Looking ahead to June, a 3.2% surge in import prices due to rising energy prices will tend to see the nominal deficit widen again, though the decent 1.1% gain in export prices will provide some offset.
Japanese corporate goods prices fell more than expected in June. The domestic component of the index fell 0.3% in the month and 6.6% over the year. With demand for capital goods essentially non-existent, construction in the doldrums and commodity prices still well below their 2008 peaks, there is little standing in the way of upstream goods price deflation.
UK producer price index showed input costs falling at an –11.0% yr pace in June, while output costs fell –1.2% yr and core output costs were up just 0.1% yr. No evidence of inflationary pressure emerging from the factory sector, where there is plenty of excess capacity both in the UK and globally.
Canadian jobs fell by a smaller than expected 7k in June, although the jobless rate continued to rise. Full-time jobs collapsed by 48k following a 59k May plunge, but once again part-time jobs rose quite strongly and in June, self-employment also mopped up most of the lost full-time work.
Canada’s trade deficit widened further in May to a new modern era record of $1.4bn, reflecting a 3.9% drop in exports (mainly automotive and energy) only partially offset by a 3.5% imports decline.
Canadian new house prices fell for the eighth month running in May, though only marginally (down 0.1%).
Outlook
NZD could test 0.6350 today, given the positive price action during the last few hours of NY trading, but should go no further than 0.6400. Our one month target remains sub- 0.6000. This morning’s retail sales report should be slightly NZD supportive, tempered by more recent transactional data.
