News and views
Risk sentiment took a sharp turn for the worse on Friday as US data fell well short of expectations and bank failures hit the headlines. UoM consumer sentiment slumped from 66 to 63.2 and inventories also disappointed. The FDIC closed four banks on Friday (Community Bank of Arizona, Community Bank of Nevada, Colonial Bank and Union Bank) taking the total number of banks closed this year to 77. Colonial Bank had total assets of $25bn and is the largest bank to fail this year.
Commodity markets had a poor session – crude oil fell 4%, nickel slid 5% but copper was more composed with a 2.7% dip. However, equity markets losses were limited with most European bourses down 1.25% and S&P500 only down 0.85%. US bond yields again probed sub 3.5% – a level that has been tested 6 times in the last 4 weeks – but again held.
FX market moves were vicious, especially for the AUD. Having hit a high above 0.8475 during the RBA Governor Stevens testimony, the AUD was slammed down to 0.8276 though it recovered to close round 0.8325. EUR had a brief foray above 1.4300 in NY but then slumped to a low of 1.4161. The NZD was remarkably resilient and put in a high of 0.6886 (high back to 29/9/08) before slipping back to close at 0.6775. AUD/NZD collapsed to hit 1.2252 – a level not seen since April of this year.
US University of Michigan consumer sentiment was surprisingly soft on the preliminary August reading, falling from 66.0 to 63.2. Most of the fall was in current conditions, down from 70.5 to 64.9, with expectations slightly weaker.
While other confidence measures have also eased from their peaks, this survey has been notably weak in the last two months. And with equity markets rising further and payrolls falling at a slower than expected pace, it’s difficult to pin down a reason for the drop in confidence.
US industrial production rose 0.5% in July, breaking an eight-month string of declines. As expected, vehicle assemblies surged as GM and Chrysler emerged from bankruptcy and the “cash for clunkers” scheme got under way. Most other segments also saw gains, though utilities recorded a sharp 2.4% drop. Capacity utilisation also rose, from a record low of 68.1% in June to 68.5% in July.
US CPI was flat in July, with core prices up 0.1%. Food and energy price declines held down the inflation rate this month, but weren’t enough to reverse the sharp 0.7% gain the headline rate in June. The annual inflation rate of -2.1% in July is likely to mark the low point of this cycle, as last year’s sharp drop in oil prices will began to drop out of the equation from August, and particularly in Oct-Dec.
Canada manufacturing shipments rose 1.9% in June, driven by strength in aerospace sales and price increases for petroleum and coal shipments.
Outlook
Last week the NZD tested the critical 0.6600 level but held. And Friday saw fresh highs for this moving despite Asian equity market losses and a deterioration in risk sentiment. This tells us that the medium term uptrend is still intact. We thus retain our upward bias on NZD/USD though the deterioration in commodity markets needs to be watched closely.
