Market wrap


Global market sentiment: Markets stabilised in NY following the previous day’s Bernanke-inspired rout. Asian and European equities earlier recorded sharp losses (Nikkei -7.3%, Eurostoxx 50 -2.1%), but the S&P500 is currently only 0.1% lower. That appears odd given the US data (jobless claims, home sales, PMI) beat consensus and would add to the QE-withdrawal argument. Perhaps markets are absorbing the Fed’s message that an exit won’t necessarily be a clear and steady path (as WSJ’s Hilsenrath repeated on CNBC overnight).


Interest rates: US 10yr treasury yields traded inside the previous day’s range, between 1.96% and 2.05%. A 10yr inflation-linked auction went at a -0.23% real yield, bid-cover slightly disappointing at 2.5 (vs 2.7 previous).


Australian 3yr government bond yields fell from 2.64% to 2.57% initially but retreated to 2.64% in NY, while the 10yr similarly traced 3.35% to 3.27% to 3.35%.


Currencies: The US dollar index is lower. EUR bounced from 1.2822 to 1.2957. USD/JPY rose from 100.83 to 102.04. AUD rose from 0.9594 to 0.9779. NZD rose from 0.8006 to 0.8171. AUD/NZD slipped from 1.2000 to 1.1945.



Economic wrap


US initial jobless claims for the week ended 18 May fell 23K to 340, a better than expected result and unwinding a large chunk of the previous week’s surge. However claims remain below their cycle low at the end of April.


US new home sales outperformed expectations, rising 2.3% in April to 454 – a touch below the recent January peak but still above the previous 420K cycle high in April 2010 when the home buyer tax credit was in effect. Sale inventory remains tight, at 4.1 months’ supply. There has been some sign of flagging momentum in existing sales (a much larger part of the US housing market) but the shortage of decent established homes available for sale suggests new home sales will keep rising.


Also on the US housing market, the FHFA home price index rose 1.3% in March from an upwardly revised Feb. The index has shown monthly gains since February 2012 and is up 7.2%yr.


The advance read of the euro zone PMIs for May was a bit better than expected and an improvement on April, but points to continued contraction in the common currency area. The factory PMI rose from 46.7 to 47.8 while the services index rose from 47.0 to 47.5.



Market Outlooks


Event risk today: NZ has the March trade balance, Westpac expecting an above consensus outturn. Tonight there’s US durable goods data.


NZD/USD 1 day: This corrective rebound should continue to 0.8200.


NZD/USD 1-3 month: The uptrend since June 2012 has been broken and a decline towards 0.7800 is looking increasingly likely. Local fundamentals remain supportive but extreme long speculative positioning warns of a clean out.


AUD/USD 1 day: This corrective rebound should continue to 0.9800.


AUD/USD 1-3 month: The contracting range since July 2011 is in the process of breaking down, 0.9600 the next major target. The Australian data flow is unsupportive, and the RBA is likely to ease further to 2.0% by Q1 2014.


AUD/NZD 1 day: Starting to break down again, 1.2025 should cap it today.


AUD/NZD 1-3 month: The trend decline to sub-1.1960 should resume once this corrective bounce is complete. Relative fundamentals (e.g. RBA easing to 2.0% vs RBNZ stuck at 2.5%) favour the NZD medium term.


NZ 2yr swap yield 1 day: Taking the lead from Australian bond yields overnight (see above) it should open unchanged at 2.92%.


NZ 2yr swap yield 1-3 month: The 2.70%-2.80% area could yet be revisited once the smoke clears from the Bernanke remark. As long as that area holds though, we expect a late-2013 rise above 3.20% based on NZ’s improving fundamentals and eventual RBNZ tightening in 2014.