News and views
Investors seemed bolder last night, jumping into equities with more confidence than has been apparent since late August, sending the S&P500 1.5% higher to 1068, and closing in on the 1120 level which represents a 50% retracement of the entire decline. Banks were 3.7% higher, Citibank expected to exit the government guarantee support program in October. US data was supportive, particularly industrial production. Commodities went along for the rise, oil +2.0% and copper 3.7%. US 10yr notes are little changed, taking comfort from a benign inflation report, as well as the low-for-long Fed stance (which means bonds and equities can both perform). There were intraday sparks, though, when a report from influential think-tank Medley was misinterpreted as predicting a Fed hike next week, moving yields 9bp within an hour.
The US dollar made another 2009 low, not far from historical 75.90 support. EUR made a year high at 1.4737, now targeting the 1.4866 Sep-08 peak, while GBP underperformed, gyrating around the 1.6500 level. USD/JPY fell to 97.13 early London, after finance minister Fujii said no currency intervention was being planned, and a weak yen was not in Japan’s interest. It bounced back later to the 91.00 area.
AUD closed in Sydney at around 0.8670 with a firm tone, and continued in that vein throughout the evening sessions, making a year-high at 0.8747 which is held this morning.
NZD was also firm, gaining almost a cent from Wellington’s close to a 0.7153 year-high. AUD/NZD was stable around 1.2240.
US industrial output expanded 0.8% in August, on top of an upwardly revised 1.0% jump in July (from 0.5% previously). They are the first consecutive monthly gains in IP since late 2007. Auto output, of course, featured strongly, although a warm weather boost to utility output (air conditioner use) also boosted the IP bottom line last month. While undoubtedly a strong report, the cash for clunkers boost to autos and the weather are temporary factors, and that means IP could weaken again from September, although the back to back gains in July-Aug business equipment output are an encouraging sign for business investment.
US CPI rose 0.4% in Aug due mainly to a 9.1% jump in gasoline prices; food prices rose 0.1%. Ex food and energy, the core rate gained by less than 0.1%, constrained by a 1.3% fall in new car prices, but all car prices fell just 0.4% because used car prices rose 1.9%. The core annual inflation rate dipped to 1.4% yr, its lowest since early 2004, but note that during the previous deflation fear episode in 2003, the core CPI fell to and held around 1.1% yr. The headline annual CPI rate turned less negative in August due to base effects - from August last year, energy prices fell sharply and that is now dropping out of the annual calculation.
In other US news, the National Association of Homebuilders market activity index rose from 18 to 19 in September, its highest since mid 2008; TIC data showed a more modest inflow in July reflecting less foreign purchases of Treasuries; the Q2 current account deficit was reported at $98.8bn, a little higher than expected because of a continued downtrend in the investment income surplus.
Euroland CPI was confirmed at –0.2% yr in August, and the core rate was steady at 1.3% yr (the same as in July).
The UK jobs market continues to soften. Unemployment (benefit claimant count) posted a 24k gain in August, about the same as in July. More discouraging was the news that in the three months to July, employment fell –217k, less than the –271k loss in Feb- April, but still a rapid pace of decline that will eat away at household spending power.
Canadian manufacturing sales jumped 5.5% in July, thanks to the strength of the auto sector, a function of the re-emergence of Chrysler and GM from bankruptcy, and the cash for clunkers program south of the border.
Outlook
The AUD and NZD rallies remain intact. Our tactical recommendation remains to buy on any dips to 0.8670 and 0.7090, respectively. The Westpac-ACCI business survey for Q3 released today is an important lead indicator for the economy.
