News and views
Month-end portfolio rebalancing and hedging may have contributed to a breakdown in correlations between asset classes last night. Equities were largely unchanged, but risk currencies gained, as did US treasuries. US data was risk-supportive, with the GDP headline beating consensus (but not so after revisions), and Chicago NAPM likewise. The S&P500 closed up 0.1%, although the VIX index gained 0.5. Oil was up 3.8%, copper +2.1%. US 10 year notes took more from the underlying components of the GDP report which showed consumer and business spending subdued, and rallied 17bp after the release. PIMCO’s McCulley opined the Fed is on hold until 2011, deflation remaining a threat.
The US dollar was under pressure during the whole London session, falling 1.2%. Apart from fixing dynamics (equity gains meant more USD exposure to hedge), an IMF report said the US dollar is moderately overvalued, and that financial strains are still elevated. Westpac’s data surprise model failed to produce a sell-dollar signal, although the chances of that have grown this week. EUR rallied from 1.4100 to 1.4280. GBP moved from 1.6475 to 1.6730. CHF was the standout performer, gaining over 2% to 1.0660.
AUD slipped to 0.8241 after the Sydney close, from where it launched a rally to 0.8367, a 2009 high. Treasurer Swan said only when growth returned to trend would stimulus be removed.
NZD fell to 0.6529, and then followed the AUD to 0.6627, just shy of its recent 0.6634 high. AUD/NZD was well contained in a 1.2600 to 1.2650 range.
US Q2 GDP down 1.0% annualised. The breakdown was exactly as we expected, with consumer spending posting a renewed modest decline; housing and business investment spending both declining less steeply than in Q1; inventory destocking continuing apace (lopping –0.8 ppts off growth); but net exports a positive (adding 1.4 ppts). Government spending added 1.1 ppts to the GDP bottom line, more than reversing its surprise Q1 fall. Overall, the 1.0% annualised decline in Q1 GDP was not as weak as the –2.0% we expected, but recent history was revised weaker, with Q1 shaved back from –5.5% to –6.4% annualised.
The IMF said that US economic recovery is likely to be gradual and more monetary and fiscal stimulus might be required should the rebound falter.
US ECI up 0.4% in Q2. A slight up-tick in wages and salaries growth lifted the employment cost index by 0.4% in Q2, a little stronger than in Q1 but still a slow pace consistent with the weak labour market. Annual growth in the ECI was the slowest on record i.e. back to 1996) at 1.8% yr.
US Chicago PMI rose from 39.9 to 43.4 in July. It continues to lag behind some of the other regional factory surveys, nevertheless it too is trending higher, consistent with a slower (but still concerning for the local burghers) pace of industrial contraction and job shedding. The other two regional factory surveys released today included a July pull-back from relative strength in June in Milwaukee, but a partial rebound in New York (one of the most noisy of all the regionals).
Japanese data: unemployment rate up to 5.4% in June, jobs-to-applicants ratio at 0.43. Employment is now 2.3% below year ago levels, representing a loss of 1.51 million jobs. June national headline CPI fell 1.8%yr, vs a 1.1%yr decline in the previous reading. The July headline for Tokyo deteriorated from 1.5%yr to 1.8%yr. Real household spending grew 0.2% from a year ago in June. July Nomura PMI improved to 50.4 from 48.2 in June. Housing starts recorded a 749k annualised pace in June, representing a 32.4% decline from a year ago.
Euroland flash estimate of the annual CPI fell to –0.6% yr in July, the lowest since the euro was introduced in 1999. However base effects will tend to push the annual rate modestly higher from here, so July’s CPI outcome could prove to be the low point. That said, the ongoing upswing in unemployment and subdued economy will continue to act against inflationary pressures building again in next year or two.
Canadian GDP fell 0.5% in May, its tenth consecutive month of decline.
Outlook
NZD remains on the verge of breaking higher. We don’t read too much into Friday night’s price action, given the usual distortions around fixing days, but a follow through higher this week would be significant. Today’s action should find support at 0.6580, with some resistance at 0.6630. There are no NZ data releases.
