The effects of China's reserve requirement increase wore off after the Asian session (Shanghai equities closed down 3.1%), European indices closing slightly firmer and the S&P500 up 0.6% as we write. Prior to the US Fed's Beige Book report on economic conditions, US markets had no major data or news to guide proceedings, a rumoured think-tank report suggesting the Fed was considering widening the Fed funds target from 0-0.25% to 0-0.5% gaining no traction. The firmer equities boosted metals, copper up 1.6%, silver up 1.4%, but gold is unchanged. Growing inventories hurt oil (down 0.8%) which appears to be headed towards the channel bottom at $73. US 10yr notes are 7bp higher, despite a solid enough auction. Similarly to the 3yr auction yesterday, though, indirect bidding (a proxy for foreign buyers) was lower. The Beige Book just released painted a picture of gradual recovery, 10 of 12 districts showing improvement, compared to 8 in December.
The US dollar slipped after the Sydney close, but recovered after the US equities opened to be little changed at just under 77 (DXY index). The EUR mirrored that action, rising to 1.4580 around London and then falling back to around 1.4480. Greece's 5yr credit spread rose further to around +320, a brewing negative for the EUR. USD/JPY ground slightly higher, from 91.00 to 91.50.
AUD closed in Sydney at 0.9225 and firmed to 0.9268 before slipping to 0.9200 during the NY session.
NZD is little changed after peeking at 0.7425 first and then 0.7370, currently sitting in the middle. AUD/NZD halted its decline of the past two days and ground up to 1.2490.
The Fed released its "Beige Book" report on US economic conditions, and it contained no surprises, saying the economy continued to improve gradually, with modest gains since the last report in December. Activity, though, remains at low levels. Ten of 12 districts showed improvement, compared with eight in December. By sector, holiday consumer spending picked up from 2008 but remains well below 2007's levels, manufacturing and car sales were steady or improved, tourism remained weak, non-financial services improved, and home sales increased (although prices were little changed). The labour market remained weak, although modest wage increases were noted in a few districts.
German GDP declined 5.0% in 2009. That implies, depending on revisions to previous quarters, a Q4 growth rate of close to 0.0%. This backs Westpac's view that after 0.4% Euroland GDP growth in Q3 last year, growth will stall again in Q4 or Q1. Q4 GDP won't be published till 12/2, and there are 2 ECB meetings prior to then, tonight and 4/2.
UK industrial production up 0.4% in Nov. The gain was due to mining/oil, with utilities down and the factory sector recording nil growth for the second month running. Still, the steep drop in industrial production back in August due to extended summer shutdowns, followed by September's partial bounce in output and the subsequent modest gain should be sufficient to help deliver modestly positive GDP growth in Q4, after six quarters of contraction from Q2 2008.
AUD/USD and NZD/USD outlook today: There may be a little further to go in this leg of the corrective selloff which started on Monday. We repeat yesterday's downside targets: 0.9180, 0.9100, or 0.9030 for AUD, according to common retracement metrics and 0.7200-0.7300 for NZD. Today's Australian employment report for December will be important, Westpac expecting consolidation after three strong gains.
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