News and views
Markets last night offered firm clues regarding medium term direction, following last week’s indecisive price action. A bid tone to risk was apparent during early London, but the consensus-beating US ISM factory report really sparked the bulls. The S&P500 opened strongly and held those gains for the session to be up 1.5% near the close, just above the psychological 1000 level, last seen in November. Earlier, China’s PMI (CLSA) reportedly rose to a one year high in June. The usual correlations were restored last night, oil up 3.3% and copper +4.6%. US treasuries duly lost ground by 16bp from the previous day, the curve steepening by 8bp. Three month Libor shed another 0.7bp to 0.47%, and the TED spread fell to a two year low, indicating further decline in financial market stress.
The US dollar was under pressure from the Sydney close, and has clearly broken below 78.30 support. EUR staged a 2.5 cent rally from 1.4210, consolidating above the two-month old range as we write. GBP rose from 1.6700 to 1.6985, outperforming most other currencies. JPY underperformed the dollar on expectations of outward Japanese investment, from 94.60 to 95.35.
AUD moved off its 0.8350 Sydney closing level to reach 0.8440, a level last seen in September 2008.
NZD finally broke decisively above the key 0.66 level, reaching 0.6688 and currently consolidating above 0.6650 AUD/NZD slipped a little, hovering around the 1.2600 level.
US ISM factory jumps to 48.7 in July. The ISM factory survey posted its seventh consecutive (and at 4.1 pts, strongest this year) monthly gain, bettering our above consensus 47.0 July forecast, although at 48.9 that still represents a modest pace of industrial decline. Within the detail we see an encouraging rise in the production index and renewed strength in orders (which had turned positive in May but fell again in June). If it were just orders and output driving the composite, July would have shown a positive headline. Indeed back in, say, 2005, when the economy was in the fourth year of recovery from the 2001 recession, readings in the mid 50s for orders and production were the norm. However in recessionary 2009, the ongoing drag from jobs, while less in July than in June, remains a significant source of industrial sector weakness, as does inventory rundown, given the way the ISM defines overall activity in the sector.
US construction spending rose 0.3% in July, just beating our above consensus forecast for a 0.2% gain. As we expected, gains in housing (consistent with the recent upswing in starts) and public spending more than offset renewed but modest declines in the private non-residential component.
German retail sales fell sharply in June; May had been previously revised to a steep fall from a modest gain. So the German retail spending picture at the end of Q2 now looks very depressed.
UK PMI factory jumps from 47.0 to 50.8 in July. As with most factory PMIs from around the world, the UK index was stronger in July, for the fifth month running. What stands the UK apart, though, is that the July result shows the industrial sector is expanding once again. That, coupled with an already expanding services PMI (>50 in both May and June), suggests that the UK economic recession is now over. It remains to be seen whether Q3 GDP data (not due until late October) confirm that signal.
Outlook
NZD has finally broken above the important 0.66 resistance level (which had held for two months), providing us with a bullish trade signal. Pullbacks from here should now be supported by 0.660, and the immediate target is 0.6700. Longer term, the case for a move towards 0.70 and beyond is building. Today’s NZ wage data should confirm the absence of cost pressures, and across the Tasman, the RBA will be watched for follow through from Governor Stevens’ recent hawkish speech. Australian retail sales will also be important.
