Risk appetite refuses to falter despite swine flu threat.
Market shrugs off ugly US GDP number, awaits FOMC monetary policy statement.
MAJOR HEADLINES – PREVIOUS SESSION
- Australia Mar. HIA New Home Sales out at 4.2% vs. 3.9% in Feb.
- New Zealand Apr. Business Confidence out at -14.5 vs. -39.3 in Mar.
- Sweden Apr. Consumer Confidence fell to -21.0 vs. -14.5 expected and -16.5 in Mar.
- EuroZone Apr. Consumer Confidence out at -31. vs. -33 expected and -34 in Mar.
- EuroZone Apr. Economic Confidence out at 67.2 vs. 65.6 expected and 64.7 in Mar.
- Switzerland KOF Swiss Leading Indicator out at -1.86 vs. -1.90 expected and -1.65 in Mar.
- US Q1 GDP initial estimate out at -6.1% vs. -4.7% expected
THEMES TO WATCH – UPCOMING SESSION
- US Weekly Crude Oil and Product Inventories (1430)
- US FOMC Rate Decision and Monetary Policy Statement (1815)
- New Zealand RBNZ Official Cash Rate (2100)
- UK Apr. GfK Consumer Confidence (2301)
- Japan Apr. Nomura/JMMA Manufacturing PMI (2315)
- Japan Mar. Industrial Production (2350)
- Australia Q1 NAB Business Confidence (0130)
- Japan Apr. 30 BoJ Target Rate (no time given)
- Japan Mar. Housing Starts (0500)
Market Comment:
Swine flu - still a risk to be reckoned with
The swoon in risk appetite triggered by the initial swine flu scare has already been reversed as the market has made a decision that it is a non-story. We certainly hope that the market is correct on this matter, but are also fearful of the potential effects on everyone if this sanguine assessment proves premature. The influenza virus is extremely dangerous when it comes out in a deadly variant, especially as it can spread swiftly before victims show signs of flu symptoms. The incubation period of the disease is usually two days, but can be anywhere from one to five days and a person is most contagious starting before symptoms are even evident. The potential for behavior change is already very large and absolutely enormous if a second, more virulent wave of the virus . Already now, travel to and from Mexico is grinding to a halt, international football tournaments in Mexico will be played behind closed doors, and economic activity in Mexico's capital has fallen 60 percent. So, again, let us all earnestly hope that the market's optimism is justified on this matter, while understanding the potential for disaster. As the saying goes "Hope for the best and prepare for the worst."
JPY and risk appetite
The JPY has finally weakened as one would expect with the continued robust signs of risk appetite. The yen has been performing relatively well all month. That performance is likely at least partially due to the spillover of end of the year effects (over the last five years, April has shown a strong tendency in reversing March moves into financial year end by the yen.). JPY crosses are likely headed higher still as long as this move in risk appetite can continue, though we think risk appetite will eventually run into tough going. Watch the bond market for confirmation of the JPY's direction, with rising yields tending to put pressure on the yen. Watch out also for the Bank of Japan tonight, for possible further QE-like moves.
USD and Commodity Currencies
The technical picture for the USD is looking very bearish after the full bore reversal to the weak side over the last couple of sessions, though we need to see a break of a few more levels out there to confirm that the weakening move has further to run considering the sharp direction changes of late. The commodity currencies are at the center of the action after they were briefly pummeled by the initial swine flu scares. AUDUSD, after shying away from the 200-day moving average on three occasions recently, has now snapped back higher and is challenging that level once again (see chart below). EURUSD was back challenging last Friday's high ahead of the US data. The USD's fate seems very wrapped up in the direction of risk appetite and equities of late.
US GDP
The initial estimate for Q1 US GDP was a much lower than expected -6.1% - almost matching the ugly Q4 numbers. It's more than interesting to have a glance at the internal numbers that go into this calculation and to wonder now accurate an impression it gives of what is going on. For example, it is very tough to swallow that Services activity has failed to contract for a single quarter out of the last eight. Considering the profound economic disruptions of the last couple of years, we have to wonder what the data means, if anything. Also, the GDP price index inexplicably rose at an annualized rate of 2.9%. This means that other numbers, especially fixed investment, fell very sharply in order to come up with the overall poor number. Looking at the initial reaction to the data, the market seems to be taking the negative data in stride as all focus seems to be on the prospects of an imminent recovery.
FOMC preview
The market now awaits the FOMC monetary policy statement this evening. The last FOMC meeting shocked the market as the Fed declared that it would move aggressively with expansion of its non-traditional monetary policy measures and most importantly, laid out plans to purchase US treasuries outright. This time around, the Fed can hardly expect to surprise the market to the same degree unless Bernanke announces imminent cash drops by helicopter across the USA. The baseline scenario is that the monetary policy statement expresses continuity of existing policies with possible fine-tuning announcements as well as the hope that Fed efforts are gaining traction. Still, there is some chance that the Fed is not satisfied with the degree to which credit is being extended to the economy by the banking system, and especially, the disappointment that longer rates have failed to move lower. The 3.00% level on the 10-year notes is very critical and an obvious market focus at the moment. So there is a reasonable chance that the Bernanke announces a stronger intent to manipulate the long end of the curve with an enlarged treasury-buying spree. At the short end of the curve, with the rate effectively at zero and the Fed already having stated that it is likely to remain at zero for some time, we should expect no new guidance on the trajectory of the Fed Funds rate. A recent study by the Fed showed that the ideal interest rate in the US would be -5% - thus indicating how much it would like to lower rates wherever they can be lowered.
RBNZ alert
Watch out for the RBNZ tonight, which is expected to drop rates 50 basis points 2.50%.
Chart: AUDUSD
AUDUSD is up challenging the 200-day moving average once again. If the positive mood continues here, a break higher would seem to be in the cards, perhaps toward the symbolic 0.7500 level. The bears need 0.7000 again to confirm that a top is in.
