Strong US economic data is being ignored as market focuses on negative Eurozone reports; US and European equities decline

by Raiko Shareef

NZ Dollar

Having failed to crack 0.8700 overnight, the NZD/USD is 0.3% lower this morning at 0.8640.

Both the AUD and the NZD drifted higher into yesterday evening, before the market took some risk off the table following poor European growth and US industrial production data.

Our Risk Appetite Index sits at 72.5% this morning, down from 77.4% at the start of the week. No wonder then, that the risk-sensitive AUD and NZD are the worst performing majors against the USD.

The official release of the NZ Budget yesterday offered little for currencies. What the Government delivered was very much in line with that signaled in previous weeks. As a result, the NZD did not budge.

Yesterday, we modestly pushed back our expectations for a USD recovery. While we retain our conviction that the US economy will gain traction, we now doubt this occurs before mid-year. As a result of the changes across the G10 spectrum, NZD/USD is now expected to be 0.84 by the end of June (from 0.82 previously), and 0.79 by year-end (from 0.78 previously).

There are no local releases due today, but all eyes will be on Fed Chair Yellen’s testimony at 10.10 NZT. Provided that she fails to surprise, it should be a quiet day ahead.
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Majors

Markets focussed on signs of economic weakness on both sides of the Atlantic overnight. The USD was broadly unchanged, but the JPY benefitted from a safe haven bid as equities tumbled.

In Europe, a swathe of weak GDP outturns across the single-currency bloc saw the EUR slide lower (but only temporarily). The preliminary reading for Euro-zone GDP in Q1 2014 showed a 0.2% q/q gain, against expectations of 0.4% rise.

While German growth was robust, much of the rest of Europe was disappointing. France (Europe’s second largest economy) failed to grow at all over the quarter, while some of the smaller economies (the Netherlands and Finland among them) contracted.

The EUR/USD later reversed a 0.5% fall amidst USD selling, but peripheral European bond yields screamed 6bps to 20bps higher. Certainly something to jar investors who had been piling into that debt in an indiscriminate grab for yield.

Across the pond, the market fretted over a 0.6% m/m decline in industrial production in April. Analysts had expected a flat outturn after a 0.7% gain in March, as temporary weather effects were unwound.

In a characteristic display of tunnel vision, the market ignored improvements in other US data. The number of people claiming jobless benefits fell to the lowest level since May 2007 last week, while core CPI inflation bested expectations to rise to 1.8% y/y. The Philly Fed Manufacturing Index and the NAHB Housing Market Index offset each other somewhat, with the former beating expectations while the latter did not.

In the midst of all this, markets adopted a cautious stance. US and European equities saw chunky declines, with the S&P 500 off by 0.9% and the Euro Stoxx 50 losing 1.5%. The JPY was the strongest performing major against the USD overnight, gaining 0.4% to 101.50. While some of this can be attributed to safe-haven interest, no doubt an eye-watering 5.9% y/y jump in Japanese GDP growth over Q1 helped. This will have been biased upward by consumption brought forward to avoid the 1 April consumption tax rise. But the backed-out inflation indicator from GDP also improved by more than expected, further diminishing the prospect of near-term Bank of Japan easing.

Today, Fed Chair Yellen’s address to the US Chamber of Commerce takes place just after 10am NZT. Once the market clears that hurdle, it should be fairly plain sailing ahead of US housing and consumer confidence data tonight.

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