Market wrap
Bernanke disappoints. The Fed Chairman’s semi-annual testimony acknowledged that US data had been disappointing but offered no fresh hints it was about embark on a new round of quantitative easing. That caused the US stockmarket (S&P500) to fall over 1% in an hour. However he did leave the door to easing open, mentioning already known options during Q&A. That contributed to a similar sized rebound, with equities extending late in the NY session to be up 0.8% currently. Fed centrist Pianalto spoke at a separate forum, echoing Bernanke’s comments that additional action was conditional on further weak data. Commodities were mixed, the CRB index unchanged but oil up 0.4%, copper down 0.6% and gold down 0.3%. US 10yr treasury yields are 3bp higher at 1.50%.
The US dollar index (DXY) rose and fell around Bernanke’s testimony, net unchanged. EUR held earlier gains until the London morning when it started to slip from 1.2317. It then fell sharply from 1.2280 to 1.2189 on the Fed disappointment, but rebounded fully a few hours later. Safe-haven yen underperformed, USD/JPY rising from 78.90 to 79.17. AUD mimicked the US equity market’s reaction, falling from 1.0290 to 1.0235 but rebounding eventually to 1.0318. The market-hawkish RBA minutes helped it outperformed most currencies yesterday. NZD similarly fell to 0.7930 and rebounded to 0.7993, a low CPI surprise and lower milk prices yesterday providing drag. AUD/NZD consequently extended its rally from 1.2880 to 1.2930.
Economic wrap
US Fed chair Bernanke testimony. Nothing really new, the labour market recovery is frustratingly slow, The Fed is trying to assess whether the loss of economic momentum is enduring and will do “best it can” and try to “do no harm” to the economy. The Fed is examining the extent of deflation risk; and assessing if the job market is “stuck in mud”. Using QE tools poses risks and the decision re their use should not be taken lightly. Bottom line - he’s increasingly worried about the economy but not hinting at a further policy response yet.
US CPI flat in June and core prices up 0.2%, with food prices up 0.2% and energy down 1.4% (including a 2% gasoline price decline). The core rate was constrained by a 2.5% fall in airfares and another soft 0.1% rise in rent. Apparel was above trend at 0.5%, car prices rose 0.2% but SUVs were flat. The headline CPI annual pace was steady at 1.7% yr but the core rate was down a tick at 2.2% yr. US industrial production rose 0.4% in June on the back of a solid 0.7% bounce in factory output reversing the may 0.7% decline. That bounce was partly due to autos but ex auto output rose 0.6%, including a 2.3% rise in machinery, its strongest gain for the year so far. Utility output weighed on the IP bottom line, down 1.9% in June after a cumulative 5% gain earlier in the quarter. US NAHB housing market index jumped from 29 to 35 in July, its highest since March 2007 but still barely half of the 72 peak back in 2005. Still, more evidence that housing is finding its legs after stalling in the first two years of the economic recovery US capital inflows $101.7bn in May, total net TIC flows, after an $8.2bn outflow in April. Net long term flows were $55.0bn up from $27.2bn in April.
German ZEW analyst economic sentiment fell from –16.9 to –19.6 in Jul, its third fall running but not as steep as in May-June. However the current situation assessment fell from 33.2 to 21.1, its lowest in 2 years and prior to that the level it has fallen to in the middle of the second quarter of recession in 2008.
UK CPI decelerated from 2.8% yr to 2.4% yr in June, its lowest since 2009 when the economy was just emerging from recession. In Sep last year the inflation rate peaked at 5.3% yr. Also the ONS reported that house prices accelerated from 1.4% yr to 2.3% yr in May.
Market outlook
AUD and NZD Outlook: Although Bernanke provided nothing new last night, easing expectations will linger and probably intensify heading into the annual central bankers symposium at Jackson Hole in August.
NZD/USD 1 day: Higher today, above 0.8005 but beyond 0.8075 unlikely.
NZD/USD 1 month: 0.7750.
NZ 2yr swap yield 1 day: Opening today unchanged at 2.64%.
NZ 2yr swap yield 1 month: We expect a move towards 2.35% within the next month, driven mainly by Eurozone disappointments.
AUD/USD 1 day: Higher today, above 1.0330 (5 July high), with no major resistance in sight until 1.0475.
AUD/USD 1 month: 0.9900.
