News and views
Markets were treated to some better news overnight. GM sounded more upbeat on production outlook and noted it was bringing back jobs and adding shifts and overtime as the cash for clunkers scheme kicked in. And German investors sounded decidedly bubbly with the ZEW index recording a high since 2006. Finally, following the iron ore deal between Baosteel and FMG earlier in the week, China was again out shopping. This time it was for LNG with Petrochina inking a massive 41bn deal for LNG with Exxon Mobil from the Australian Gorgon gas field.
Not surprisingly, commodities had a better session with crude recovering much of the previous two sessions losses. S&P500 closed back above the 990 for gains of 1% while European bourses showed similar gains. US bonds traded sub 3.5 but yet again held and yields rose slightly on improved sentiment. The 3.50 level is emerging as a very pivotal level for 10yr bonds.
EUR saw demand off lows in NY at 1.4069 and saw a high of 1.4155. AUD again traded sub 0.8200 as US housing data disappointed however as the day wore on in NY, better sentiment saw it lift back above 0.8250 to a high of 0.8275. NZD remained in demand and touched highs of 0.6759. The AUD/NZD cross made fresh lows for the move at 1.2205.
US housing construction data for July looked weak at face value – starts fell 1.0% and permits were down 1.8%, while the market was looking for solid gains in both. However, the weakness was in multiples (e.g. apartments) with starts falling by 13%. This component is always volatile, and July’s weakness appears to have been concentrated in the Northeast, which had unusually wet weather during the month. In contrast, singlefamily home starts rose by 1.7%, the fifth straight gain, while permits were up 5.8%, providing further evidence that the housing market is in the early stages of recovery.
US producer prices fell 0.9% in July, with core prices down 0.1%. While both were softer than the market expected, this only partly unwound the 1.8% gain in June, which was driven largely by gasoline prices but also by surprising gains in vehicle prices.
German ZEW economic sentiment surged again in August, following a dip last month (which probably reflected the brief hiatus in the equity market rally in early July). Expectations rose from 39.5 to 56.1, the strongest reading since April 2006. The current conditions component was also stronger than expected, but at -77.2 it is only back to where it was in January, and remains consistent with a very weak level of activity.
UK consumer prices were flat in July, against market expectations of a 0.3% fall. Fuel prices were lower, but the Stats office reported upward price pressures across a wide range of items during the month. Core inflation was 1.8% yr, the highest since November 2008. The BoE has warned that the CPI will be volatile over the near term, and the greater risk is still for a breach of the lower end of the target band in coming months.
Outlook
NZD/USD resilience in the face of equity jitters tells us that the medium term uptrend is still intact. We thus retain our upward bias on NZD/USD near term as global data momentum still remains favourable for commodity currencies multi-day.
