News and views
Spooked investors bailed from risk ahead of the Halloween weekend. There was little of substance to attribute the declines to, US economic data generally at or better than consensus, although US mutual funds’ year end may have contributed. The S&P500 fell at the open and kept going to close 2.8% down, banks (-4.1%) and financials (-5.3%) hit the hardest. Commercial lender CIT plunged 24% on expectations it would file for bankruptcy. The VIX index surged to over 30, a level considered indicative of significant risk aversion. The other main asset classes followed equities in the usual fashion, commodities all lower (oil -3.6%, copper -2.8%) apart from gold which was unchanged. US 10yr notes rallied by 10bp. The world’s largest bond fund, PIMCO, said the recession may not be over and advised selling risk assets in favour of treasuries.
The USD gained moderately across a basket of currencies, but significantly against commodity currencies. EUR declined from around 1.4850 to 1.4700. The yen closed much stronger at around 90.00. CAD was the second worst performer among the majors, losing 1.8% against the dollar.
AUD left Sydney at 0.9150, and it was one-way traffic to 0.8980. NZD was the hardest hit, losing 2.4% to 0.7156. AUD/NZD continued higher to 1.2555, and is now clear of the sixmonth old trading channel.
US core PCE deflator up 0.1% in Sep. This was in line with Westpac’s forecast and consistent with the subdued 1.4% quarterly annualised data published in the Q3 GDP report. The annual core PCE deflator of 1.3% yr is just a whisker away from the 1.2% yr rate seen briefly in the late 1990s, which is the lowest this inflation measure has seen in the modern (post 60s) era. Nil personal income growth and a 0.5% fall in personal spending were also consistent with the quarterly totals and reflected the subdued state of the household sector post cash for clunkers.
US employment cost index up 0.4% in Q3. Subdued wages and benefits growth of 0.4% each are consistent with the sluggish labour market, and pulled annual compensation growth down to just 1.5% yr, the slowest since the early 1980s recession.
US October business surveys mixed: The Chicago PMI surged from 46.1 to 54.2, suggesting that firms are boosting activity in response to the renewed growth in the economy. However the neighbouring but less closely watched Milwaukee NAPM fell from 58 to 50. Also, staying with Midwest-run surveys, the Uni of Mich’s consumer sentiment index was revised up from 69.4 to 70.6 in the final Oct report, but that still left a 2.9pt drop in place, compared to Sep.
The BoJ left rates unchanged today. Obviously the target is on hold for a considerable period. The board did announce that the CP purchasing facility would be discontinued on schedule, but other unconventional accommodations would remain in place.
Japanese CPI flat in Sep and -2.2%yr, reflecting the degree of slack across domestic markets and the strengthening yen. While firming commodity prices are removing one source of deflation evident earlier in the year, services prices are increasingly falling joining durables goods in negative territory. The Tokyo CPI series, which runs one month ahead, fell 0.4% in October, pushing the annual rate to -2.4%.
Euroland CPI –0.1% yr in Oct, the fifth consecutive month of annual disinflation, though base effects should see inflation turn positive again as soon as Nov. Meanwhile the Euroland jobless rate edged up from 9.6% to 9.7% yr, its highest since Jan 1999 when the euro was introduced. With the US jobless rate on 9.8%, 10% unemployment rates are likely on both sides of the Atlantic before long. In other news, German retail sales fell 0.5% in Sep, the fourth month out of five with no gain, consistent with ongoing consumer recession even if broader GDP is growing again.
UK house prices up 0.4% in Oct, lifting the annual pace to 2.0% yr, the first positive since March last year on the Nationwide index. Also GfK reported consumer confidence up from –16 to –13 in Oct.
Canadian GDP fell 0.1% in Aug, with oil and gas extraction down 2.3% and factory output down 0.7%. That is the first monthly GDP decline since April; Q3 is still expected to post positive growth, but it may be softer than the 2% annualised pace projected by BoC Gov Carney recently.
Outlook
AUD/USD and NZD/USD outlook today: AUD us holding above 0.8950 for now, but a break below that opens up 0.8860. NZD looks more vulnerable, having already broken several support levels, and we would be inclined to sell on any rallies to 0.7250. The AUD/NZD cross looks supported at 1.2400.
