Markets looking for confirmation of improvement and growth

By Mike Jones

While the market waits for tonight’s LTRO & ongoing clarity in European matters we’ve witnessed an overnight session impacted by month end flows & data releases – although most currencies trade this morning at familiar levels.

The AUD buoyed by commercial appetite in our flows sits near the 1.0750 level, outpacing as evidenced by the cross the Kiwi where we continue to see some unwinding of “long” NZD cross positions. The EUR continues to find favour on cross rates – and NZDEUR is not immune to this, trading near 0.6225 – some way from mid February highs near 0.6400.

The NZD trades this morning at 0.8370, having stalled below 0.8420 once again in overnight trade.

There’s a busy day of data on both sides of the Tasman looming. At 10:45am, we are looking for January’s building consents to keep a positive trend in place, on route to acceleration later in the year.

Later in the day at 1:00pm, the NBBO business survey will be closely watched as the first meaty assessment of the business pulse in the New Year.

We expect it to keep defying the doomsayers, remaining broadly consistent with GDP growth running at trend, at a minimum. Firms’ assessment of their own activity will be important in this regard.

While in Australia, after the damp squib of political drama earlier in the week, the countdown to the Q4 GDP release (on March 7) accelerates today with the release of the two business investment indicators.

Our analysts expect construction work done to ease 3% after the strong 12.5% growth in Q3, as weak building work offsets the ongoing strength in engineering construction.

At the same time (1:30pm NZT) retail sales are expected to be weak (January data) with a rise of just 0.1%, while the same month’s private sector credit should be similarly soft with a rise of just 0.2% expected.

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European equity indices tended to finish the day with marginal gains, and Wall Street is similarly disposed as we open – thanks to Confidence among U.S. consumers.

The index rose in February to the highest level in a year, showing households may sustain spending and drive the economy. The Conference Board’s index increased more than forecast, to 70.8 from a revised 61.5 in January, figures from the New York-based private research group showed today. Economists predicted the gauge would climb to 63.

The Richmond Fed's February manufacturing index widely topped estimates printing at 20 versus 14 expected and 12 previous. Earlier in the NY day the volatile Durable Goods Orders racked up their largest decline in three years, with both the headline and non-defence reading down more than 4%. On the back of the Confidence data the EUR rushed out of the blocks, improving from the 1.3400 level to test the session’s highs at 1.3465.

Earlier in the night markets witnessed mixed updates on various EZ confidence data, while breaking news included German Courts challenging the “unconstitutional” nature of the small & opaque Parliamentary panel that decides EFSF aid. The ECB said Greek debt will temporarily be ineligible as collateral for loans after Standard & Poor’s yesterday cut Greece’s credit rating to “selective default.”

Ireland will hold a referendum to ratify the European fiscal compact; PM Kenny said that the government decided to hold a vote after receiving legal advice from the state’s attorney general. In contrast to two previous Irish referendums in European policies, a veto wouldn’t sink the treaty, which requires support from just 12 of the 17 euro countries.

There is of course plenty of focus on the ECB’s 3-year LTRO (which takes place tonight, results 14:30 GMT). We know the last auction solicited bids of EUR498 bln and that markets are broadly looking for between that and EUR 1 tln. But these are pure guesstimates and do not take into account roughly EUR250 bln of shorter-dated maturing operations, meaning the actual net number could be smaller. In addition the Netherlands votes on Greece’s bailout plan tonight from 11:00 GMT, with Finland from 19:00 GMT.

So the LTRO and the votes will dominate trade & the media in the very short-term, but perhaps markets are moving towards a more macro-dependent period with global manufacturing PMI’s Thursday, service sector PMI’s and NFP’s next week. While analysts including our own expect these to be supportive of steady growth improvement, markets will want to see confirmation to maintain optimism.

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