Slump in US consumer confidence and Eurozone economic sentiment, but NZ$ holds up

By Mike Burrowes

Yesterday the NZD was once again dominated by the continued rush of “hot money”, proprietary & technical funds to the fore with demand for NZ dollars and NZ government bonds in our flows. Some would argue they ignored potential hiccups in the form of the call on the EQC or the detail of the Building Permits update.

The outright NZD demand spurred gains on the NZDAUD cross, which extended to challenge the 0.8000 level overnight. NZDEUR has pushed to trade above 0.5900 and the NZDGBP to 0.5230, levels not seen since the start of this month before risk aversion swept through the markets, hurting NZD cross rates as global equity indices were mauled.

We will open this morning with the NZD still in good heart, near overnight highs at 0.8550 – the AUD printing on a 1.0700 handle, as both currencies regain much of the haven appeal that drove their ascent through the month of July.

Yesterday July’s building consents weren’t quite as rip-roaring as they looked. Still, they denoted a clear turning point.

Starting with residential consents, their number jumped a seasonally adjusted 13.0% in July capturing a bounce in apartments, to 168, from June’s meagre 60. Non-residential consents were flattered by the $105m consent going through for work on Middlemore Hospital (another boon for Auckland’s construction market, along with the about-to-start, and massive, Waterview roading project). Excluding the hospital, non-residential consents were still very mixed, barely matching year-ago levels.

Nonetheless, it’s also clear that building consents are in the least bottoming (something backed up by the way concrete production has stabilised over the first half of 2011, having slumped good and proper over 2008/09).

The key event on the local calendar is today’s NBNZ business survey. As we have already noted its sentiment reading is likely to have cooled noticeably, from July’s red-hot result, so the big question is to what extent the latest global turmoil has buckled the survey’s own-activity indicators.

These were exceptionally strong in July, and only a big fall would begin to threaten our still-upbeat NZ GDP view. Recall our own confidence survey, taken at a similar time, showed business confidence slump from a net 45% who were optimistic about their lot down to a net 22%. The July National Bank survey stood at +47.6% for headline business confidence. We would expect this to drop to a similar level as the BNZ survey.

Headed for 86 USc?

On the day the NZD would initially appear well placed to challenge the US 86 cent level, with initial support noted on a retreat to the 0.8475/0.8500 window.

The brighter tone in global equity markets did not last much beyond Tuesday’s Tokyo close and though Germany’s DAX Index opened on the up it was downhill all the way through the European session.

Eurozone economic sentiment fell further in August with the business climate indicator falling to 0.07, its lowest level since March 2010. The indicator is expressed as a standard deviation around a trend so it still points to growth in industrial production in the Eurozone, albeit growth at a very low pace. The EU Commission’s monthly sentiment surveys showed a similar pattern with the headline economic confidence index falling from 103 to 98.2, well below its historic average of 101.9 and its lowest level since May 2010.

Poor Italian bond auction

Away from equities (where the “risk-on, dollar down” mood still very much prevails), a disappointing Italian Government bond auction also weighed on investor sentiment.

This was the first 10 year BTP auction since the ECB began buying and though €3.75bn were sold at an average yield of 5.22%, the bid-to-cover ratio of just 1.27 compared unfavourably with the last auction’s 1.38 on July 28th. EUR/USD remained under pressure throughout the European morning, falling from the 1.4530 level to test below 1.4400 in the NY morning.

An initially positive tone as the US shift arrived at their desks helped stabilise currencies after their morning drift lower and the market awaited Consumer Confidence data for August. Against expectations of a 7 point drop to 52.0, the headline number printed at 44.5; the lowest since the Fed first embarked on its QE programme in Q1 2009. CaseShiller Housing updates showed some evidence of price stability though commentary has highlighted their Composite 20 Index falling 4.5%, the index illustrates house prices in the top 20 metropolitan areas.

Fed divisions

The FOMC minutes of their August 9 meeting show that last week's Jackson Hole announcement of a two day meeting for September was actually agreed to earlier this month. The two days set aside as Bernanke informed us, to consider and discuss all potential tools, their costs & benefits. The minutes show the division at the table, which has been evident in various public comments. Even overnight we have heard from Evans and Kocherlakota separately with their divergent views.

The minutes also show the FOMC could consider extending the maturity of their asset purchases. The “Twist” trade seeing them sell short dated securities of 1-3 year duration and purchase 10 year assets. Since the release of the minutes, US equity markets have improved somewhat, the S&P regaining positive territory on the day.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.