News and views
Large bounce in risk sentiment. US equities (S&P500) are currently 3.0% higher following a day of news conducive to risk seeking. The earlier solid outcomes for Australian GDP and Chinese manufacturing set the starting tone for the European and US sessions, partly explaining the modest effect the weak US (ADP) jobs report had on markets. US manufacturing data later continued the bullish theme.
Other factors at play may have been new-month buying, as well as a seasonal effect. Commodities rose, oil’s +2.8% reversing the previous day’s loss, and copper (+3.0%) made a four-month high. Milk product prices at Fonterra’s auction rose 17% overall compared a month ago, exceeding expectations. US 10yr treasury yields rose 11bp to 2.58%.
The US dollar index behaved in as a safe haven, falling around 1% after Sydney closed. EUR rose from 1.2700 to 1.2956, settling at 1.2800. Yen underperformed on the shift to risky currencies, USD/JPY slightly higher after a volatile day spanning 83.65 and 84.65. The day’s outperformer, AUD, advanced on earlier GDP and China fuelled gains, from the 0.9010 Sydney close to 0.9100 (a three week high). NZD rose with the rest to 0.7130, the Fonterra milk auction result an extra boost. That result pulled AUD/NZD back from its 1.2830 high to 1.2760.
US ISM Manufacturing unexpectedly rose in August to 56.3 from 55.5 previously. Market consensus was for a decline to 52.8. New orders fell only moderately from 53.5 to a still healthy 53.1, while employment rose to 60.4 from 58.6 and production posted an increase to 59.9. The report seems slightly at odds with some of the regional surveys which have pointed to a more marked slowdown recently but despite the better than expected report this month, the recovery in the US manufacturing sector has clearly slowed in recent months.
US Construction Spending contracted by 1.0% in July. Spending in June was also revised down to -0.8% from a previously reported +0.1%.
US ADP employment fell by 10k in August following a downwardly revised gain of 37k in July. This was the first negative print since January and adds to the evidence of a faltering US labour market.
Across the sectors, there were declines in manufacturing (-7k) and goods producing firms (-40k). Service industries managed a 30k gain but well off the pace of the 67k gain in July.
The final August EUR PMI Manufacturing was revised up to 55.1from 55.0. There were very moderate revisions to the components; of note was an upward revision to 55.3 from 55.0 in new orders (but still lower than July). Between the countries, France and Ireland were both revised higher.
German PMI Manufacturing was unchanged from the August flash estimate at 58.2.
UK PMI Manufacturing for August came in much weaker than expected, falling to 54.3 from 56.9, the weakest outturn since last November. New orders, in particular, fell sharply suggesting a further slowdown in the headline over the coming months.
Outlook
AUD/USD and NZD/USD outlook next 24 hours: The better riskseeking environment should support commodity currencies today. AUD needs to break above 0.9100 minor resistance before advancing on the 0.9220 August high. NZD has tough resistance at 0.7150 and 0.7200.
