News and views
US equity investors returned from their long-weekend in a buoyant mood, gapping the S&P500 1.3% higher. Supportive was the NY Fed factory survey (the first of the sentiment readings for the US manufacturing sector each month) which reported a jump in business conditions, and Barclays earnings surprise, helping boost US financials 2.1% higher. Commodities were strong, which was attributed to US dollar strength, oil +3.6%, copper +4.0%, silver 3.9%, gold +1.4%, and wheat +3.8%. US 10yr notes were initially weaker, gaining 3bp on the better risk sentiment, but the past hour’s rebound sees them 2bp lower on the day. Foreign demand for US long term securities rose in December, reflecting a gradual normalisation of market activity. That report also said Japan’s holdings of US treasuries rose to the largest for any foreigner, while China’s dipped. Fitch raised Jamaica’s credit rating to B-, citing IMF assistance.
The US dollar (index) fell 0.9% to 79.68 amid the improved sentiment towards risk. EUR consolidated for much of the session around 1.3650 before jumping to 1.3775 in NY. GBP failed to fire after a bullish CPI release, but followed EUR higher in NY to 1.5793. The yen underperformed the dollar on reduced safe-haven needs, USD/JPY rising from 89.70 to 90.50 before slipping back to 90.10 in NY.
AUD rose from its Sydney close around 0.8950 to 0.9025, additional support coming from influential journalist Terry McCrann’s opinion the RBA would hike by 25bp in March, and another 100-200bp this year.
NZD followed AUD higher to 0.7080. AUD/NZD nudged higher to 1.2780.
US NY Fed index jumps 10 pts to 24.9 in Feb, its second highest reading since late 2007, but the orders and shipments activity readings were both softer, and the jobs index was only modestly stronger. In other words NY factory bosses’ assessment of overall business conditions is more up-beat than what those same bosses are reporting about their own firms. One interesting detail was a sharp jump in the inventories reading. There may be a seasonality issue at play but on the face of it, this is another piece of evidence supporting the view that the industrial sector is benefitting from renewed stock-building.
US TIC data show $63.3bn net long term inflow in Dec. That represents still strong demand for US financial assets, despite some official sales (including from China).
US NAHB homebuilders’ sentiment rose from 15 to 17 in February. The extension of the first home buyers’ tax credit until April will have helped, but the market for new homes remains weighed down by oversupply and rising foreclosures.
German ZEW headline expectations index posted its fifth consecutive month of slippage in Feb. It fell from 47.2 to 45.1, consistent with the news that Q3’s GDP growth pace (0.7% in Germany; 0.4% in Euroland) was not sustainable in Q4 and raising doubts about Q1. That said, the current measure posted a further gain, but at around –55 it is still indicative of weak economic circumstances (i.e. it is in the bottom quartile of the -100 to +100 survey range over the past two decades).
UK CPI jumped to 3.5% yr in Jan, reflecting last month’s re-imposition of the 17.5% VAT rate, after thirteen months at 15.0%. On top of the VAT effect, late 2008’s energy price drops have also fallen out of the annual rate. BoE Governor King has made it clear on several occasions that policy-makers will look through the current inflation spike when setting policy, including in today’s open letter to the Chancellor, which he is required to write when inflation deviates from the 2% target by 1 ppt or more. In the letter he noted that inflation at 3.5% was a “temporary deviation” and that underlying pressures were “to the downside”.
AUD/USD and NZD/USD outlook next 24 hours: AUD broke above 0.8900 resistance with conviction and 0.8920 becomes support for today. NZD broke above 0.7000 cleanly, and now has support at 0.7020.