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Westpac Institutional Bank Morning Report 22.2.10

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Fuseworks Media
Fuseworks Media
Westpac Institutional Bank Morning Report 22.2.10

News and views

Risk markets looked set to move lower in Europe and the US, after the Fed took a step toward policy normalisation during Friday's Sydney session. US equities did sell off after the opening bell, but quickly turned around to close 0.2% higher, weaker reported CPI inflation arguing for a continuation of supportive Fed policies. Commodities responded positively, perhaps interpreting the signal as further evidence of economic growth, oil +1.0%, copper +2.2%, gold +0.9%, and silver +2.9%. US 2yr treasury yields rose overall, bouncing 10bp bounce after the Fed news, but returning 4bp before Friday's close on dovish comments from various Fed members and the inflation report. This week's offering of nominal bonds matches the previous record volume, and the 30yr inflation-linked offering will be the first since 2001.

The US dollar gave back most of its Fed-incited gains after Europe opened, the index falling from an 81.34 peak to 80.55. EUR rose from 1.3460 to 1.3618. GBP underperformed, weighed by a weak retail sales report, but still managed to recover from 1.5350 to 1.5470. USD/JPY ranged around 91.80 until a late NY slip to 91.50.

AUD dipped a little further after the Sydney close, to 0.8880, but it was all upwards thereafter, reaching 0.8990 and trading this morning at 0.9010.

NZD rose from 0.6930 to 0.6995, and trades this morning at 0.7005. AUD/NZD made a 1.2877 high, last seen in May 2009, holding above 1.2840 all evening.

US CPI rose by 0.2% for the fifth month in a row in Jan with energy up 2.8% (including 4.4% for gasoline) and food up 0.2%. But the big surprise was the first negative core rate for nearly thirty years. It fell by more than 0.1%, thanks to a 0.3% fall in the housing component (driven by rents, lodging costs and household operations), a 0.1% fall in apparel, a 2.5% fall in airfares and ongoing declines in recreation. An above trend 0.5% jump in medical care prevented the core rate from rounding to a 0.2% decline! This is the third month running that the core CPI has come in below 0.1% and consequently the three month annualised core CPI is 0.0% and over 6 months it annualises to 0.8%. That is very soft and detracts from the view that the US deflationary scare is over.

The proportion of US mortgages in default fell for the first time in three years in Q4 last year, from 9.64% to 9.47%, with both prime and sub-prime mortgages seeing defaults ease. That could be due in part to newer mortgages being issued only after more careful credit checking, but the Mortgage Bankers' Association was cautiously optimistic that the problem was "now as big as it's going to get". That said, foreclosures continued to rise, and the percentage of mortgages in either default or foreclosure at 15.02% was at an all time high. That is, more than one in seven of all US mortgages are now either in default or worse.

Euroland advance PMI was quite a bit stronger on the factory side but weaker for services (again) in February, so the composite was stalled at 53.7, below its recent peak in December. Note the PMI accelerated right through Q4 when GDP growth slowed sharply from 0.4% in Q3 to 0.1%, so the signal from this particular index is not so reliable at the moment.

UK retail sales fell 1.8% in January, reflecting the severe weather disruption and VAT hike at the start of January. These figures are soft enough to deliver a flat or small negative Q1 GDP growth rate, depending on the extent of any bounce in February.

Canadian retail sales rose 0.4% in December, both total and ex autos. In both cases the gain did not fully offset the November decline in sales. Also, the leading index rose 0.9% in January, its ninth consecutive month without falling.

Outlook

AUD/USD and NZD/USD outlook next 24 hours: AUD bounced impressively late Friday, providing a positive bias to today's session, although 0.9040 overhead should be sticky. NZD should also trade with a firm tone, constrained by 0.7080 overhead.

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