News and views
The solid close in Shanghai stocks helped European equities higher and optimism spilled over into the US markets. The S&P pushed back towards the 1010 level with a high just over 1008. AIG was the top gainer on the day on comments that “at the end of the day ... they will be able to pay back the government” though it’s not clear what day AIG chief Benmosche was talking about. But financials were up again. Citibank touched 4.50 a level not seen since Jan of this year. Comments from Geithner that “fear was giving way to emerging confidence” certainly helped while a solid Philly Fed was further reason for optimism.
US bonds finally pushed through and held beneath the 3.50 level – currently at 3.42. Front month crude hit 72.88 a high back to June. However, other commodities were less bubbly – copper down 0.46, sugar down 3% and natural gas down 6%. FX markets were pretty quiet. EUR spent much of the day round 1.4230 though it popped to a high of 1.4270 late in the NY session. AUD hit a low of 0.8270 in the London but then again rebounded towards the high of 0.8334. NZD also had a dip to 0.6729 but trades round 0.6770.
The Philly Fed factory index rose to 4.2 in August, resuming its upward progress after a dip to -7.5 in July. Orders and shipments turned positive again, while the labour indicators improved but remained in negative territory. Along with the strong bounce in the NY survey earlier this week, this provides further evidence that the US manufacturing sector is inching towards growth.
US initial jobless claims rose by 15k to 576k in the week to 14 August (which is also the survey week for nonfarm payrolls). Continuing claims have sustained most of their recent drop, rising just 2k to 6,241k in the previous week. The data are now free of distortions from the auto sector, and show a solid improvement from the March peaks – but they will need to start trending lower again soon if we’re going to see positive payrolls growth by year-end as many economists are picking.
US leading index rose 0.6% in July, the fourth straight monthly increase. The Conference Boards’ preferred gauge of recession, the six-month annualised change, rose to 6.2%, the strongest pace since July 2004.
US mortgage delinquencies rose to 9.24% in Q2, another record high, although the rate of increase has slowed. Delinquency rates on subprime mortgages rose to a whopping 23.6% from 22.7% in Q1, but prime mortgages are deteriorating as well (up from 4.68% to 5.23%) as rising unemployment takes its toll.
UK retail sales volumes rose 0.4% in July, in line with forecasts, though historical revisions lifted the annual rate to 3.3% (2.9% expected). While warm weather was seen as behind the 1.3% rise in sales in June, wet weather perversely seems to have been a plus this time around – spending on food reversing June’s 0.9% gain, but spending on household goods surged by 4.5%.
UK public sector borrowing requirement reached £8bn in July, far worse than expected and the first July deficit in 13 years. Net debt, including Northern Rock liabilities, rose to 56.8% of GDP. More evidence (if any were needed) of the parlous state of UK finances.
Outlook
We continue to run with a buy dips view for both AUD and NZD. NZD resilience in the face of equity market jitters tells us the medium term uptrend is still intact. The high 0.8100 level has survived a number of attempts this week and seems to be solid support. Weakness back to the high 0.8100 should be viewed as good levels to re-establish longs.
