News and views
Strong durable goods (although core slightly missed estimates) and new home sales reports couldn’t shake the S&P500 from yesterday’s level. Some looked to comments from China’s cabinet, saying excessive investment in sectors facing overcapacity would be curbed, as a factor behind the muting of risk. Technicians have noted sentiment readings for S&P500 small traders at extreme highs in optimism, similar to that prevailing in June 2007. The August doldrums may well also be contributing. Whatever the true cause, the lack of conviction spilled over into oil (-1.0%) and platinum (-0.6%), although copper eked out a +0.5%. US 10yr notes were also stuck around yesterday’s 3.44% yield. Fed member Lockhart said the quality, rather than speed, of recovery was most important, echoing most mainstream central bankers around the world who are in no rush to tighten policy.
The Chinese comments did have an observable effect on currencies, the US dollar index gaining almost 1% in the hours afterwards. Earlier, EUR spiked to 1.4348, following a strong German IFO report, but then fell to 1.4207. GBP maintained underperformer status, falling from 1.6350 to 1.6150. JPY again was a picture of stability around 94.20.
AUD’s reaction to the Chinese news was the most pronounced, as one would expect, and it fell from Sydney’s close (0.8360) to 0.8256, forming a multi-day top.
NZD made another assault on 0.6900 but was 5 pips shy, and the ensuing 1 cent selloff has approximately traced a key reversal day. AUD/NZD broke key 1.22 support, reaching 1.2142.
US durable goods orders up 4.9% in July. Durable goods orders posted a renewed and sharp gain in July, boosted by defence (15%), autos (0.9%, with more to come in Aug thanks to Cash for Clunkers) and especially civilian aircraft orders, which more than doubled, all much as expected. Revisions were to the upside too, and inventory rundown continued, although at a slower pace. The surprise, which adds a further positive note, was that core capital goods orders posted the mildest of declines (just –0.3%) in July, after back-to-back monthly gains in May-June worth a cumulative 8% after June’s upward revision, the first such positive string since June-July last year. That is further evidence that business investment spending might make a positive contribution to GDP growth heading into Q3.
US new home sales soared a further 9% in July making it four gains in a row, and back revisions were positive overall even though June’s previously reported 11% jump was shaved back to 9%. A clear uptrend in sales is now in place, and in-roads are being made into the stock of unsold new homes, at least in part due to the sharply lower prices for new housing compared to a year ago. Government measures to encourage first home buyers are also helping, though these are scheduled to run off in Nov. July’s gain was not broad-based across the regions, with only the Northeast and South posting solid gains, the West flat and the Midwest down a bit, but all regions have trended clearly higher since earlier this year. All that said, from the July 2005 peak to the Jan 2009 trough, new home sales fell 76%; six months into the “recovery”, home sales are still down 69% from their peak four years earlier.
Japan’s trade balance fell to ¥195bn in July (s.a.) from ¥374bn in June. Import values rose 3.0% in the month, with volumes slightly firmer than that at 3.3%. Exports fell 1.3%.
Japanese small business confidence firmed in August. The Shoko Chukin index improved to 41.8 in Aug from 41.1 in July (and 30.4 in March).
Japanese corporate services prices fell 0.2% in July. That marks the third decline in four months, and pushes the annual rate to -3.4%.
German IFO rises from 87 4 to 90.5 in Aug. German business confidence continues to recover smartly, with expectations soaring, and current conditions moving further off their lows – exactly the pattern you would expect to see with GDP growth turning around from sharply negative in Q1 to modestly positive in Q2. Also German import prices decelerated further to –12.6% yr in July, while in Aug, the first of the early reporting states, North Rhine-Westfalia, saw its CPI rise from –0.7% yr to 0.0% yr, with base effects now turning unfavourable (i.e. falling energy prices from Aug last year dropping out of the calculation).
Outlook
AUD and NZD outlook today: The past 3 days has seen a lack of follow through in this rally which started in early July (the larger degree rally started in March). Last night’s turnaround on its own is not enough evidence to suggest a deeper correction is about to unfold, but we remain vigilant. A break below 0.8220 and 0.6760, in AUD and NZD respectively, would have us ringing the alarm bells. Today’s AU CAPEX report will shed light on GDP, and in NZ, the trade balance may deteriorate on rising imports.
