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Westpac Institutional Bank Morning Report 2.2.10

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Fuseworks Media
Fuseworks Media
Westpac Institutional Bank Morning Report 2.2.10

News and views

US equities rebounded yesterday, after a two-week battering, helping commodities and risky currencies do the same. Strong manufacturing surveys in the US, Eurozone, and UK sparked investors into buying at the opening bell and holding those gains into the session.

The US report showed manufacturing expanded at the fastest pace since August 2004, and new orders remained strong relative to inventories, indicating further strength ahead. Indeed, ISM chairman Ore said the survey pointed to a V-shaped recovery.

The S&P500 is up 1.1%. Commodities rose on the strong manufacturing reports, oil +1.5%, gold +2.1%, and copper +1.2%. US treasuries were sold on the bullish news, 10yr notes up 7bp and the curve 2bp steeper.

The US dollar weakened modestly as equities rallied, but held its ground after the factory data. EUR bounced from its over sold state during the Asian session, and well before its own factory data, rising to 1.3935. The US report then saw it slip back below 1.3900, before rising to 1.3920 where it current sits. USD/JPY rallied on the US data, from 90.40 to 90.90.

AUD was briefly spooked lower to 0.8789 after a report that Chinese authorities were concerned credit was being "illegally" allocated to the property and equity markets, but equities sentiment propelled it to 0.8909.

NZD also rebounded, from just under 0.7000 to 0.7091. AUD/NZD fell from 1.2600 to 1.2550.

US ISM factory survey jumps from 54.9 to 58.4 in Jan. That's the highest since 2004 and certainly consistent with the solid GDP growth momentum at the turn of the year. Production, orders and jobs all hit new cycle highs, driven largely, we suspect, by firms rebuilding their inventory levels.

US construction spending fell 1.2% in Dec and Nov was revised to a similar fall. These declines were driven by weakness in both residential and non-res activity, the former consistent with weakness in other housing data due to uncertainty about the extension of the tax credit for home-buyers, since resolved.

US core PCE deflator up 0.1% in Dec. This, along with a 0.4% rise in personal income and 0.2% for personal spending is largely old news given last week's quarterly GDP report.

The White House announced a further $100bn of fiscal stimulus, helping to take this year's US budget deficit to a record $1.6trn, or nearly 11% of GDP (and Europe is worried at 7%!). Expect plenty of debate in Congress before these plans actually turn into additional dollars in the economy.

Euroland factory PMI revised up from 52.0 to 52.4 in Jan, its highest in almost two years. Also, the UK factory PMI jumped from 54.6 to 56.7 in Jan, a solid result given potential weather disruption.

UK household credit growth grows in Dec, just. Net consumer credit expanded GBP0.1bn after five months of decline, while net mortgage lending grew by GBP1.2bn, its fifth monthly gain of over GBP1bn. However the number of new mortgages approved slipped slightly from 60k to 59k in Dec. Meanwhile, in Jan, Hometrack reported a 0.1% rise in house prices, for a -0.8% yr annual pace of decline.

Outlook

AUD/USD and NZD/USD outlook today: The currencies need to rise in the short term to alleviate their oversold conditions. AUD should bounce to somewhere between 0.8920 and 0.9100, the NZD to the 0.7100-0.7270 area. NZD is set to form a bullish outside-up day at the NY close, adding technical evidence to the view. The RBA meeting today, and tonight's Fonterra auction pose major event risk.

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