Market wrap

Global market sentiment: Risk sentiment was initially buoyed by the weekend’s reports of a dovish appointment to the Japanese central bank but soured after Italian election projections indicated a possibly hung Parliament. The S&P500 is currently down 0.6% after falling 1.3% on the Italian news. Commodities were resilient, Brent oil +0.5%, copper+0.3% and gold +0.5%, but non-traded iron ore fell 1.1%.

Interest rates: US 10yr treasury yields initially firmed from 1.96% to 2.00% but then fell to 1.88%, Catalysts included Italy, a disappointing Dallas manufacturing survey, and an article from influential Fed-watcher Hilsenrath saying a tapered, rather than abrupt, exit from QE will be the likely approach when economic conditions allow. The 2-10yr curve is 8bp flatter at 164bp. A 2yr auction was disappointing (3.3 bid-cover ratio vs 3.8 average), caution ahead of Bernanke’s testimony cited.

Australian 3yr bond (futures yields) initially bounced from 2.85% to 2.90% before slumping to 2.81%.

Currencies: The US dollar index (DXY) was volatile but is net unchanged. EUR initially rose from 1.3190 to 1.3319 before falling to 1.3159 on Italy. USD/JPY fell on profittaking from 94.30 to 93.21. AUD mimicked the EUR, rising from 1.0273 to 1.0328 before falling to 1.0274. NZD similarly rose from 0.8360 to 0.8414 before retreating to 0.8370. AUD/NZD ground from 1.2290 to 1.2260.

Economic wrap

US Dallas Fed factory index slipped from 5.5 to 2.2 in Feb, reversing Jan’s rose, but remaining positive for the third month running after contractionary readings in seven of the eight previous months. This more or less repeats the pattern of the last few years – turn of year gains followed by mid year slump – and is probably a function of distorted seasonal adjustment factors (affecting many US data series since the post Lehmans economic slump) as much as genuine swings in sentiment. The detail showed production, orders and jobs all recording slower growth in Feb.

US Chicago Fed national activity indicator slowed from 0.25 to –0.32 in Jan. This index is based on 80+ data series and reflects a softer overall activity picture than in Nov-Dec.

UK mortgage lending slowed from 33.4k new loans in Dec to 32.2k in Jan according to BBA data covering ~70% of the market, the lowest since Sep.

Italian election outcome. Exit polls show Silvio Berlusconi’s centre right coalition leading the vote in the Senate, while the market preferred Bersani centre-left alliance looks to have secured the lower house. Fears that could make for an unworkable government saw risk assets lose ground during the London afternoon.

Outlook

Event risk today: NZ’s inflation expectations report is often a market mover, particularly since the RBNZ said last year it is highly influential for monetary policy. Also closely watched will be RBA Assistant Governor Debelle’s speech on the exchange rate’s effect on the economy (recall last week’s RBNZ speech on a similar topic caused a 0.6 cent fall in NZD/USD). Tonight Fed Chairman Bernanke testifies to the Senate on monetary policy. On top of all of that there’s an APEC meeting of central bankers which may create the odd headline.

NZD/USD 1 day: 0.8420 should provide a ceiling, 0.8315 at risk of being tested today.

NZD/USD 1-3 month: The positive trend since May remains intact as long as 0.8300 holds, targeting 0.0.8535 and beyond (0.8840+ sometime this year).

NZ 2yr swap yield 1 day: Opening today down 3bp at 2.96%.

NZ 2yr swap yield 1-3 month: Our next major target level is 3.18%, supported by improving NZ data and higher US yields.

AUD/USD 1 day: The 1.0260 minor support level is at risk today, beyond that 1.0225 is critical.

AUD/USD 1-3 month: Remains inside an 18-month consolidation triangle, which should see it reach 1.0150 before an eventual break above 1.0600.