News and views
Sentiment gapped higher last night as the green shoots showed signs of revival. US earnings results have generally beaten estimates, and economic data has been supportive. US CPI, Empire manufacturing, industrial production, and capacity utilisation all beat consensus. The S&P500 is 3.0% higher this morning. US 10yr treasuries were sold heavily from the London open, up 15bp to 3.60%. Oil gained 3.7%, copper +4.1%. The Fed’s FOMC minutes showed members believing the economy to be vulnerable and eventual recovery slow, but central forecasts for growth were upgraded.
The US dollar lost ground from the Sydney session’s open yesterday, and continued lower throughout London and NY, the index down around 0.9%. Russia’s central bank deputy supported the dollar as a reserve currency, and also seemed to endorse a 10% depreciation in the RUB. EUR made a 10-day high at 1.4135. China was reported as relaxing its rules restricting capital outflows. GBP underperformed EUR, up to 1.6465, poor jobless claims numbers hurting. Safe-haven JPY was sold from 93.50 to 94.50 during NY. Commodity currencies led the pack, CAD moving from 1.1345 to 1.1100. Canadian M&A news was an additional boost.
AUD gained a cent to 0.8055. Today’s RBA FX transactions report for June will be searched for clues regarding intervention to buy USD.
NZD outperformed from 0.6400 to 0.6513. A large NZ earthquake was noted by offshore markets only briefly, being less catastrophic than first thought. AUD/NZD has established a new support level at 1.2340, but looks vulnerable.
US NY Fed factory index rose by a solid 9 pts to –0.6 in July, just failing to return to positive territory, but still only modestly shy of Westpac’s top of the range +2 forecast. Some of the detail was especially solid, with new orders and shipments both surging by around 15 pts into clearly positive territory, though jobs failed to improve much.
US industrial production fell just 0.4% in June, the sector’s most modest contraction since July last year, though manufacturing’s decline of 0.6% was a little steeper. The detail showed most sub-sectors of industry continuing to decline, but at a much slower pace compared to earlier this year – so the message from the regional surveys noted above is not that far off the mark.
US CPI jumped by a relatively steep 0.7% in June, mostly due to a 17.3% surge in retail gasoline prices. Food prices were unchanged last month but other pressures were apparent in new vehicle prices, clothing and recreation. But with offset from another subdued 0.1% gain in the highly weighted implicit rents and another below trend gain in medical care, the core rate was constrained to a 0.2% rise.
FOMC minutes for the June 23-24 meeting showed that members still felt that the economy was weak and vulnerable to any further shocks. GDP growth forecasts were revised up relative to the April meeting, but ditto for the unemployment rate, with the central tendency at 9.8% to 10.1% for this year. The committee considered options for extending their asset purchase programs, but decided that further purchases could distort the market and that the economic benefits were uncertain.
Bank of Japan maintained its target interest rate at 0.10%. It has kept the rate steady since December, and should remain on hold indefinitely, in the absence of inflation.
Euroland CPI was confirmed at –0.1% yr in June, and the core rate eased from 1.5% yr in May to 1.4% yr in June.
UK jobs market continues to soften, but – depending on which part of the report you focus on – less dramatically than earlier this year. Unemployment (benefit claimant count) posted a 24k gain in June, the smallest increase since May last year. Less encouraging was the news that in the three months to May, employment fell –269k. Also, unemployment as measured by the household survey jumped 281k in the three months to May.
Canadian manufacturing shipments plunged 6.0% in May, keeping in place the downtrend that began in August last year.
Outlook
The US earnings season has become a larger boost to sentiment than expected, propelling the NZD close to key resistance at 0.6600. We remain bearish over the next month, but would alter that view on a breach of that key level. Today’s CPI release shouldn’t trouble the market, given inflation is off the RBNZ’s radar for now. If anything, a positive surprise to the +0.5% (q/q) expectation would move NZD more than a negative surprise.
