Sentiment towards risky assets improved further after the ECB meeting and some US economic data. The ECB hiked its policy rate by 25bp to 1.50% and signalled another hike is possible within the next few months, The former outcome was widely expected, while the latter was only slightly surprising. What did surprise markets was the ECB’s announcement it would accept even junk-rated Portuguese debt as collateral for ECB loans. US private employment data also sprung a bullish surprise, and helped push the S&P500 1.2% higher to a fresh twomonth high. The CRB commodities index is up 1.8%, oil +1.9%, and copper +2.3% to a threemonth high. US 10yr treasury yields rose 6bp to 3.17 after the above news, and then settled in NY at 3.15.
The US dollar index spiked after the US data but fell on the ECB collateral news for little net change on the day. EUR was weak during the London morning but bounced from a session low of 1.4221 to 1.4375 after the ECB news. Safe-haven yen under-performed, USD/JPY rising from 81.00 to 81.41 and settling around 81.25. AUD out-performed the majors in the wake of a strong employment report, rising from a pre-ECB base of 1.0720 to 1.0778. NZD similarly benefitted, and is testing the post-fl oat high of 0.8332 as we write. AUD/NZD retraced its domestic session spike, falling from 1.3020 to 1.2930.
US ADP private payrolls rise 157k in June. This follows 36k in May, and is still the second weakest private sector jobs outcome for the year so far, but clearly not as weak as generally expected. In Q2 this series averaged 124k monthly growth, down from 199k in Q1 – still a significant job market slowdown. For tomorrow’s BLS payrolls (private component) to show this kind of slowdown in Q2, it would need to print just 25k in June, so we are not inclined to change our forecast for an 80k rise in private payrolls, and a 65k total payrolls gain.
US initial jobless claims fell 14k to 418k in the week ended 2/7. That is the lowest outcome since early March, but still well above the 388-400k range seen in much of Feb-April. We would caution that claims data around holiday weekends need to be interpreted carefully. Not too that in coming weeks the earlier than usual shutdown of auto plants due to supply chain disruption from Japan could make for significant seasonal adjustment distortions if the usual pattern of summer shutdowns for new model retooling is impacted.
Canadian Ivey PMI fell from 65.5 to 59.9 in June after seasonal adjustment, still a reasonably elevated level. New house prices rose 0.4%, their fastest gain since prices stopped falling in mid 2009.
European Central Bank lifted its repo rate 25bp to 1.50%, citing upside risks to price stability and the need to keep inflation expectations in the euro area firmly anchored in line with the aim of maintaining inflation rates below, but close to, 2% over the medium term. In the press conference ECB chief Trichet confirmed the ECB would relax it minimum credit rating threshold so that it can continue accepting Portuguese bonds as collateral for loans to banks, even though they are now junk rated.
German industrial production up 1.2% in May after falling 0.8% in April – a clear slowdown in trend IP growth after averaging 1.5% through Q1.
Bank of England on hold at 0.5% and the asset purchase program remains held at £200bn - as expected and no detail in the statement. On the data front, industrial production rose 0.9% in May after falling 1.7% in April, weighed down by mining, oil and gas. Manufacturing did better, up 1.8% after April’s 1.6% fall. As the partial data come together, GDP growth in Q2 is shaping up at a meagre 0.1-0.2%, after essentially
AUD/USD and NZD/USD outlook next 24 hours: There is no local economic data of note, so that positive sentiment should carry through until tonight’s US payrolls report There is also China CPI and trade balance released during the weekend. AUD has bounced off its hourly neckline at 1.0650, allowing for a move above 1.0790 during the next day. NZD’s correction likely ended at 0.8234, shallower than the 0.8200 we were expecting, and should now move towards 0.8400.
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