Market wrap
The overnight sessions saw most markets wash around previous levels, albeit with a risk-positive bias. Japan’s expansion of its quantitative easing program was moderately supportive for some currency, bond and equity markets, and US home sales data providing a boost. Fed hawk George was critical of QE3 but has no market impact. European equities closed 0.6% higher and the S&P500 is currently up 0.4%. Commodities were mixed, Brent oil futures down 3.6% on an inventory surge but copper up 0.5%. US 10yr treasury yields fell from 1.83% to 1.76%, while Spain’s 10yr rallied by 20bp. A Portuguese bill auction resulted in a significant drop in funding costs.
The US dollar index (DXY) weakened slightly. EUR fell into midday London and recovered from 1.2993 to 1.3076 during the afternoon. The yen, which had predictably weakened in immediate response to the BOJ’s monetary expansion then perversely strengthened overnight, USD/JPY falling from 79.21 to 78.26. AUD weakened to 1.0429 by noon London but then pushed higher to 1.0497. NZD similarly fell from 0.8295 to 0.8262 and recovered to 0.8293. AUD/NZD found strong support at the 1.2600 area, recovering to 1.2665 last night.
Economic wrap
US housing starts rise 2.3% in Aug but permits fall 1.0%. Single family starts reversed their revised 4.5% drop in July with a 5.5% August rise, partially offset by a 4.9% fall in multiples; permits fell 1% with the single family component up just 0.2% and multiples down 3.0%. Over the year to Aug, starts rose 29.1% while permits were up 24.5%. The 750k annualised pace for starts in Aug was the second highest pace (after June’s 754k) since late 2008. Starts bottomed at a 478k pace in April 2009 after falling 79% from their 2273k peak there years earlier in 2006, so although the 57% gain since their trough three years ago sounds impressive, that still only represents a recovery of 15% of the lost activity between 2006 and 2009. Meanwhile, sales of existing homes jumped 7.8% in August, when measured at contract completion. That represents a rise of 10% since the start of this year, compared to a 15% rise in sales measured at signing. Some of that slippage represents an increased rate of cancelled sales prior to final exchange. The median house price was up 9.5%yr, partly due to composition (more larger houses) but also some underlying house price gains, according to the NAR economist who compiles the data.
Canadian house prices rose 0.2% in Aug for a 4.1% yr annual pace of gain, the slowest annual rate since the middle of last year, according to Teranet/National Bank.
Bank of England minutes to Sep MPC meeting showed unanimous decision to maintain £375bn asset purchase plan (due to be completed by Nov) but one member saw a strong case for announcing further asset purchases immediately and others felt that additional stimulus was more likely than not to be needed in due course. Westpac’s published forecasts do not incorporate further QE from the BoE beyond November but clearly the risks are skewed towards additional asset purchases.
Market outlook
AUD and NZD Outlooks: NZ’s GDP for Q2 will be the main local event (+0.4% consensus), followed by China’s PMI (HSBC version).
NZD/USD 1 day: NZD looks less compelling than AUD near term, 0.8300 above probably containing and 0.8245 below at risk.
NZD/USD 1 month: Higher, with 0.8470 the next major target (29 Feb high).
NZ 2yr swap yield 1 day: Opening today 1bp lower at 2.72%.
NZ 2yr swap yield 1 month: Higher to 2.85%-2.95%, then back to 2.60%.
AUD/USD 1 day: Near-term momentum argues for higher today to 1.0520 next.
AUD/USD 1 month: Higher towards 1.0650 (year-old trend resistance).
