News and views
This week’s rebound in risk appetite faltered around the time of the European open. US equities (including futures) peaked then, and are 0.6% lower as we write. A disappointing US services ISM contributed to the latter part of the move, but growing negative sentiment (e.g. stock-market tipsters’ expectations of a further sell-off are rising, and PIMCO said January’s sell-off was a precursor to a difficult year) seems to be the main culprit. Portugal was back under the microscope, markets noting a poor Portugese tbill auction (yields bounced 30bp) and a record high Portugal credit spread. Adding some cheer, Lithuania’s sovereign credit rating (BBB) outlook was raised by Standard & Poor’s from negative to stable, following efforts to cut the budget deficit. Commodities posted only minor losses (CRB -0.7%), apart from copper (-3.7%) which has been particularly sentiment driven and hurt by China concerns, and silver (-2.1%). US treasuries also fell, adding 5bp to the 10yr note, a stronger reading for the private-sector payrolls report partly responsible. Norway’s central bank remained on hold at 1.75%.
The US dollar rose 0.9% from the European opening. EUR fell from 1.4025 to 1.3900 without interruption. USD/JPY followed the theme, rising from 90.10 to above 91.20, yen the evening’s underperformer.
AUD peaked at 0.8916 and fell to just below 0.8820.
NZD reached 0.7150 and then fell to 0.7070. AUD/NZD consolidated between 1.2450 and 1.2500.
US ISM non-manufacturing headline rose 0.7 pts to 50.5 in Jan, exactly in line with Westpac’s forecast (and highest since May 2008). Orders rose but activity slowed, possibly a function of weather disruption (snowstorms). The ISM reported that four sectors recorded growth in January (utilities, information, wholesale and other) but eleven were still contracting. Employment continued to contract but at the slowest pace since August 2008.
US ADP private payrolls fell 22k in Jan, continuing to show an improving labour market, albeit one that is still modestly shedding jobs. Note that in Q4 last year, in two of the three months, ADP came in pretty close to the official private payrolls data, although it missed the Nov positive surprise. Layoff announcements continue to diminish as well; relative to a year earlier, they were down 70.4% yr in Jan. Given these developments, we remain comfortable with our forecast for a –40k total payrolls decline in Jan, though uncertainties around this Friday’s report are wider than usual. That is mainly because the seasonal factor for January is huge but unknown (new seasonals will be applied and backdated).
Euroland PMI services saw a modest 0.2 pt upward revision from 52.3 to 52.5 in Jan but that still leaves in place a 1.1 pt decline, its first significant fall in almost a year. Also, Euroland retail sales were flat in Dec after falling in Nov. On a quarterly basis, retail volumes fell 0.2% in Q4 vs 0.3% in Q3, consistent with the view that the European household sector did not make a significant contribution to GDP growth in the last quarter of 2009 (as was the case right through last year).
UK services PMI came in a little below Westpac’s bottom of the range 55.0 forecast; the 2.3 pt drop to 54.5 was the steepest fall since the doom and gloom of late 2008 and left the index at its lowest since August last year, when the economy was still in recession. Snow disruption and the VAT hike would have been factors at play; this result supports our view that UK GDP growth risks slipping negative again after Q4’s weak 0.1% climb out of recession.
Outlook
AUD/USD and NZD/USD outlook today: AUD reached its immediate target of 0.8900 but struggled beyond, and that level provides a cap for today. Australian retail sales provides event risk. NZD got close to its objective for a bounce, and 0.7140 caps the upside for today. NZ unemployment is reported this morning, a key guide input to RBNZ thinking.
