US jobs data disappointed investors, prompting a broad selloff in equities. The
S&P500 plunged at the open, and remained weak to close down 1.7%. Chartists
will point to Wednesday's key day reversal as the warning, and bears will note
VIX jumped back over 30 (it appears 30 is the new 40, the psychological
demarcation between optimism and pessimism). A significant jolt to US sentiment came from Standard and Poor's
unexpected revision of the United Kingdom's sovereign (foreign currency) credit rating
from AAA to AAA (negative outlook), citing the high government debt levels
projected over the medium term. The announcement affected many asset classes in
many countries, including US 10 year treasuries which sold off by 17bp. Credit
default swaps for the UK, relative to Germany, were 5bp higher on the day. US 3mth Libor
fell, as has been usual, but by a larger 5.5bp to 0.66%.
While negative events have benefited
the USD in the cycle, expectations that the US could be in line for the ratings chopping block
saw the dollar index weaken by 0.9%. This breakdown in correlations saw EUR
jump higher to around 1.39 at midday NY, after spending the European session
fixed at 1.38 (some countries on holiday). GBP fell from 1.5800 to
1.5515 around the Standard & Poor's news, but climbed back over the next 6
hours to 1.5890, a 6-month high. USD/JPY posted a 2-month low, at 94.
AUD was supported by USD weakness, the UK's rating producing a prolonged dip to 0.7670
before recovering to 0.7795. There was speculation the RBA may have sold AUD
above 0.7800. NZD dipped a cent on the rating, to 0.6015, but is
back around 0.6100. AUD/NZD slipped to a lower 1.27 to 1.28 range. NZ interest
rate swaps rates are 5bp higher this morning, following US and AU rates.
US Philly Fed posted virtually no
headline improvement in May,
rising 1.8pts to -22.6, indeed the new orders index was slightly weaker.
Shipments and jobs, however, posted more significant gains, but even these
readings are still consistent with sharply contracting activity.
US leading index posted its first
monthly rise since June last year in April. Almost half of the 1.0% gain was due to the surging stock market;
interest rates and consumer confidence explained most of the rest although
lower initial jobless claims and the work-week also contributed. This is a
positive signal although a turning point is not usually called until three
consecutive positives are recorded.
US initial jobless claims fell 12k
to 631k last week (the prior week
was boosted by Chrysler related layoffs) but remained within the 605k to 674k
range that has prevailed since the end of January. This is the payrolls survey
week and with the 4 week claims average of 629k comparing to 648k in the same
week in April, there are grounds for expecting a modestly smaller fall in
non-farm payrolls in May compared to April.
Japanese tertiary activity index
slumps 4%. The index, which
tracks household and business spending on phone calls, power and transport,
recorded its sharpest fall in 12yrs, well below expectations of a 1.5% decline.
Coming on the heels of the horror 15.2% annualised rate of contraction in Q1
GDP, the result underscores how the export-led slump is now permeating
throughout the domestic economy.
Euroland advance PMIs showed a
further improvement in May,
still consistent with declining economic activity in the second quarter, but
not as drastically weak as Q1's 2.5% GDP contraction.
UK business investment fell 5.5% in
Q1, limiting the scope for an
upward revision to Q1 GDP growth. Also UK retail sales volumes posted back to back rises
in March and April in the newly revamped retail sales series. The April gain of
0.9% was close to our 0.8% forecast and reflected temporary factors such as the
timing of Easter and the relatively hot weather last month
Standard & Poor's revised its
outlook on the UK's AAA credit rating from stable to negative, coinciding with the publication of April public
borrowing data which revealed further deterioration in the UK's public finances.
Recall that earlier this year, Spain and then Ireland lost their AAA S&P ratings.
Monday is a London and NY market holiday, so we expect volatility
tonight from heightened position squaring. Given positions are likely long risk
currencies, any squaring should produce a selloff in NZD during the next 24
hours. Adding to the negativity, extrapolations of the UK's rating onto NZ, given the budget next
Thursday, are possible. The 0.6130 level is still important resistance, though,
and should that be exceeded for whatever reason, NZD would go much higher.
Country Release Last Forecast
22 May US
Jpn Bank of Japan Meeting
UK Q1 GDP
Revision â€“1.9% â€“1.8%
Retail Sales 0.2% 0.5%
25 May US
Jpn BoJ Monthly
Industry Activity Index â€“2.0% â€“
Ger May Ifo
Business Climate 83.7 84.9
UK Late May
26 May NZ
Apr Merchandise Trade NZDm 324 450
Inflation Expectations 2.3% 2.1%
â€¢ NZ Budget
2009 Preview (21 May)
â€¢ NZ Weekly
Forex Outlook (18 May)
â€¢ NZ Q1
Retail Sales Review (15 May)
â€¢ NZ Weekly
Forex Outlook (11 May)
â€¢ NZ Q1 HLFS
Review (7 May)
â€¢ NZ Weekly
Forex Outlook (4 May)
papers/publications are available on Online Research on Westpac
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Mon 19 Mar 2018 Tue 20 Mar 2018 AA 9:30 GB- CPI A 10:00 DE- ZEW Survey Wed 21 Mar 2018 AA 03:00 AU- Employment AA 9:30 GB- Employment A 12:30 US- Current Account AA 14:00 US- Existing Homes Sales A 14:30 US- EIA Crude A A18:00 US- Fed Rate Decision A 21:00 NZ- RBNZ Rate Decision Thu 22 Mar 2018 AA All Day flash PMIs AA 9:30 GB- Retail Sales AA 12:00 GB- Bank Of England Decision A 13:30 US- Weekly Jobless Fri 23 Mar 2018 AA 12:30 CA- CPI/Retail Sales A 12:30 US- Durable Goods A 14:00 US- New Homes Sales
John M. Bland, MBA co-founding Partner, Global-View.com
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