Market Highlights
Australian dollar: Financials tarnish US dollar sentiment.
USD remained in favour in the London/NY overlap, with US July PPI even higher than expected. But US equity losses extended, ultimately pulling USD lower, about -0.7% from the NY morning highs. Financials came under renewed pressure, due to ex-IMF chief economist Rogoff's latest comments that the 'worst is yet to come' with bank failures and saying GSE equity holders 'should lose all their money.' A squeeze in oil also didn't help USD. In late trade, Lehmans sagged -13%, FRE -6%, MER and BoA -4%. Still, it wasn't all bad for the GSEs, as Freddie's $3bn 5yr bond issue went reasonably well.
AUD/USD chopped around 0.8640 to 0.8695 in London then squeezed a little higher in NY in sympathy with the euro. AUD/ NZD dipped as low as 1.2173 given the firm kiwi, steadying around 1.2210 in late NY. EUR/USD looked underwhelming in European trade, ranging from 1.4638 to 1.4710 before its short-covering squeeze sent it to 1.4790. USD/JPY was fairly soggy throughout London trade, slipping below 110.00 and showing little inclination to rally, given the DJIA opened 70pts lower and then slipped to -155pts before steadying. The New Zealand dollar tracked firmly higher, from its 0.7045 low in early London to as high as 0.7152 in the NY afternoon.
Economic data and events
US PPI up 1.2% in July. The PPI jumped sharply in July, reflecting the tail end of the commodity price boom but also unexpected strength in core factory price pressures, as well as core input and intermediate prices. The surprise was the 0.7% jump in the core measure. It reflected a 1.4% jump in auto prices charged to dealers, and 0.8% for light trucks (which might help explain why auto sales are slumping); a 0.1% rise in clothing prices (still down in annual terms but the weaker US$ and transport costs might be impacting here); and a way above trend 0.8% increase in capital equipment prices (which make up nearly 40% of the core rate). Even though the headline PPI will be falling sharply from next month, if these core pressures persist, recent above trend rises in the core CPI might persist too, and that will be of particular concern to many at the Fed.
On that point, the Fed's most hawkish regional president, Richard Fisher from Dallas, said that 'the recent burst of cost-push inflation is giving the beast digestion problems that might manifest themselves in the form of a lingering inflationary fever'.
US housing starts/permits down 11%/18% in July. The double digit falls in housing starts and permits were as expected. Recall that a July 1 building code change in NY saw developers scramble to get building approved and commenced before that date. Hence multiple starts/approvals in the northeast rose 103%/115% in June and fell 30%/63% in July. Activity will have been pulled forward not just from July but from August and beyond too so we should expect ongoing weak headline data in the months ahead. But abstracting from this distortion, single family starts and permits (not impacted by the code change) fell to yet new multi-decade lows in July. With pending/existing home sales seemingly finding a base as plunging prices in some regions create bargains, that sector of the market is 'stealing' sales from the new build market.
German ZEW improves from -63.9 to -55.5 in August. The ZEW expectations survey of 320 or so German analysts and economists posted a partial bounceback in August which we suspect reflects the recent depreciation of the euro, the less hawkish ECB, lower oil prices and the gains on the stockmarket over the past month. But the current measures continued to tumble, consistent with the fall in GDP growth we saw in Q2 and may well see repeated in Q3.
Westpac Institutional Bank
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