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Westpac Institutional Bank Morning Report

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Fuseworks Media
Fuseworks Media
Westpac Institutional Bank Morning Report

News and views

Sovereign credit fears again dominated the world's markets, civil unrest in Greece effectively closing the country and raising doubts about promised austerity measures.

Contagion fears were further raised after Portugal's Aa2 credit rating by Moody's was placed on review for a possible downgrade within three months, the recent deterioration in public finances and increased financing costs cited. The 10yr government bonds of Greece, Portugal and Ireland rose 78bp, 34bp, and 28bp respectively, while Germany and Switzerland's fell 9bp and 10bp. Equities were weaker in most markets, the Eurostoxx50 down 1.4% and the S&P500 down 0.8% currently. The VIX measure of risk aversion continued the previous day's spike higher. Commodities (CRB) fell 1.3% overall, oil hard hit (3.7%), while gold did its job, up 0.4%. The European issues prompted further flight to the safety of US treasuries, shedding yields in the 2yr by 6bp and the 10yr by 5bp.

The US dollar index benefited from the heightened risk aversion, making a fresh 12-mth high of 84.31. The EUR did the inverse, making a 1.2804 low. Norway's central bank raised its rate by 25bp as expected, only briefly containing NOK weakness. The yen outperformed all, moving from 95.00 to 93.60 against the dollar.

AUD fell from just above 0.9100 to 0.9021, recovering slightly to 0.9055 currently.

NZD fell from around 0.7200 to 0.7143, and sits at 0.7165. AUD/NZD consolidated slightly higher between 1.2620 and 1.2670.

US private payroll employment up 32k in April. The steady improvement in the ADP series contrasts with the more volatile official payrolls data (ex public sector workers). The official BLS March payrolls included an unknown but possibly sizeable bounce in jobs from weather disruption in Feb, when private jobs rose from 8k in Feb to a 123k gain in Mar. With GDP growth slowing in Q1 from Q4 and small business hiring intentions weaker, we expect a soft private payrolls outcome close to 0k in Friday's April data. ADP (not as impacted by temporary weather factors) is not inconsistent with that, so we are sticking with our 200k total payrolls forecast including government Census workers of 200k. Still on the labour market, corporate layoff announcements totalled 38k in April, their lowest since 2006.

US non-factory ISM steady at 55.4 in April. Business activity edged up to 60.3, but orders slipped 4.1 pts to 58.2 and employment contracted again, at 49.5 (another support for our Friday payrolls forecast). This is a solid enough report, but services still clearly lag manufacturing.

US housing market is "something we have to worry about" according to Boston Fed president Rosengren.

European Commission spring forecasts. The EC lifted its Euroland GDP forecast from 0.7% to 0.9% for 2010, compared to Westpac's 0.6%. The report contains updated budget deficit numbers for 2009 out to 2011, and must make alarming reading for those sticklers to the Maastricht rule that deficits should not exceed 3% of GDP: Ireland on 14.3% last year, Greece on 13.6%, Spain on 11.2%; thank goodness for Luxembourg on 0.7%! The overall Euroland deficit was 6.3% of GDP in 2009.

Euroland retail sales volumes flat in March. They are yet to post a rise in 2010. Sales contracted 0.1% compared to a year earlier. In other news the PMI services was revised up slightly from 55.5 to 55.6 in April.

UK PMI construction jumps from 53.1 to 58.2 in April, a real surprise and the strongest outcome since 2007.

Outlook

AUD/USD and NZD/USD outlook next 24 hours: AUD's expected range is within 0.9000 and 0.9130, retail sales of interest today. NZD has fallen back inside its multi-month channel, and should remain inside 0.7100 to 0.7200, unless today's employment report surprises.

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