News and views
Risk assets took a breather (S&P500 -0.3%) and the dollar caught a bid (DXY +0.7%) on US data softer than expectations and some hawkish Fedspeak. PPI and industrial production disappointed, capacity utilisation almost on consensus. Richmond Fed President Jeffrey Lacker said the Fed shouldn’t be paralysed by patches of lingering weakness from raising rates to contain inflation. The tone was in contrast to Bernanke’s comments yesterday, apart from the dollar-supportive stance. Adding to the lessstimulatory atmosphere, the Fed announced it will reduce the maximum maturity on discount window loans from 90 days to 28 days, effective from January, citing improved financial market conditions. US 10yr treasuries shed 2bp overall, the 2yr unchanged. A government report showed international demand for long-term US assets rose in September, Japan and China increasing their treasury holdings. Commodities generally consolidated around their recent highs.
EUR had a down day, from 1.4950 to a 1.4808 intraday low, currently resting just under 1.4850. GBP held recent gains to range between 1.6750 and 1.6875 on M&A talk regarding Cadbury. The dollar also bounced against the yen to around 89.40.
AUD fell from 0.9350 to 0.9237, back inside a seven-day range, journalist Terry McCrann’s view the RBA will hike by 25bp in December producing only a temporary and minor bounce.
NZD fell back to 0.7409, opening this morning around 0.7445. AUD/NZD slipped a little further to 1.2440, appearing to head for old channel support at 1.2350.
US industrial production posted a meagre 0.1% rise in Oct. Manufacturing output fell 0.1%, due to ongoing weakness in business equipment and a modest pull-back in auto production after the 38% surge of the previous three months. Mining output posted a 0.2% fall so it was the 1.6% rise in utilities (due to the onset of cold weather a little earlier than usual this year) that explained all of October’s IP gain. This result contrasts with the further sharp acceleration in the national ISM factory survey for October, but is more consistent with the fall in manufacturing hours worked recorded in the October payrolls report. This result may see Q4 GDP forecasts shaved back a bit.
US PPI posted a partial rebound of 0.3% in Oct, reflecting 1.6% gains in both food and energy which together make up 36% of the PPI. But a 0.6% fall in the core PPI, due to sharply lower light truck prices, prevented a much steeper jump in the headline.
US TIC data showed private buying of Treasuries still dominating long-term flows in Sep (+$41bn), while a big swing in interbank flows (back to inflow) explained a much larger total flows number.
US National Association of Homebuilders housing market index was steady at 17 in Nov, while October was revised down from 18 to 17. The recent high was 19 in September. Last week’s extension of the tax credit for first home buyers may not have been captured by this survey.
Euroland trade balance widened to a surplus of €6.8bn in Sep, the sixth in a row and the largest surplus since July 2004. This was driven by a 5.5% jump in exports, although the available breakdown doesn’t make it clear how important vehicle sales were in that figure (we suspect highly so). On a related point, ECB chief Trichet reiterated twice today that “a strong US dollar is in the world’s best interest”. European officials are worried that euro appreciation will add to the woes still confronting their economy.
UK CPI rises 0.4 ppts to 1.5% yr in Oct, and will rise sharply further between now and January, during which time base effects (mainly last year’s falling energy prices) will add another 1.2 ppts to the CPI headline. Then between February and June, base effects will lop 2.2 ppts off the CPI headline. The Bank of England will largely “look through” this temporary spike when determining monetary policy.
Outlook
AUD/USD and NZD/USD outlook today: Buying on dips today remains the preferred strategy, but with tight stops below recent supports. In AUD’s case, the support level would be 0.9210, while for NZD it would be further back at 0.7310.
