Markets on Friday were optimistic a Spanish rescue was nearby, and they weren't disappointed. After months of official denials, on Sunday Spain joined Ireland, Portugal, and Greece in the list of Eurozone countries which have requested a financial rescue. The amount could be around EUR100bn and will target the ailing banking sector. The IMF will administer (but not contribute) the aid which has much more lenient fiscal conditions attached than was the case for the other countries. China data released during the weekend was mixed, inflation, industrial production and retail sales all disappointing but imports and exports rising sharply. The S&P500 closed in NY up 0.8% with much of that occurring during the last hour, and US 10yr treasury yields closed unchanged at 1.64%; both should open higher today in response to the Spanish rescue.
The US dollar index (DXY) rose and fell around the London afternoon for little net change. EUR fell from 1.2500 to 1.2436 and bounced to 1.2517 on waning and and waxing expectations regarding the timing of a Spanish rescue announcement. It opened this morning sharply higher around 1.2640 – a two week high. USD/JPY bounced from 79.10 to 70.60 on Friday and is higher at 79.70 this morning. AUD made a 0.9822 intraday low early London, rising in NY to close on Friday at 0.9916. It opened this morning sharply higher, almost reaching parity (0.9988). NZD similarly rose from 0.7619 to 0.7703 on Friday, and rose to 0.7765 early this morning. AUD/NZD fell from 1.2920 to 1.2860
US initial jobless claims fall 12k to 377k last week, reversing most of the late May spike but still leaving in place a modest uptrend since mid February, consistent with the slower pace of jobs growth in recent months.
US Fed chairman Ben Bernanke testimony. The economy is at risk from Europe and the "fiscal cliff " embodied in current US policy unless Congress manages to legislate for a new tax/ spending mix before the year is out. Yet again Bernanke said he had the tools to provide further stimulus if needed but did not specify what they might be. With colleagues Janet Yellen and Denis Lockhart also musing about further easing there is clearly still a reasonable possibility of QE3 in some form, and that has been Westpac's forecast ever since QE2 was announced in late 2010.
Canada Ivey PMI jumps from 52.7 to 60.5 in May, recovering most of the April drop. After long delays Spain requested EU aid to recapitalise its struggling banking system. European ministers have said they would be prepared to lend up to €100bn. Unlike Ireland's similarly bank-focused bailout package, the money will be channelled directly to Spain's banks through its bank resolution fund, and conditions come in the form of outside bank supervision rather than new austerity measures. This is perhaps the most market-friendly of the plausible outcomes and a necessary shot in the arm for Spanish banks ahead of Greek elections, but it adds to the Spanish government's debt and so doesn't decisively break the bank debt/ sovereign debt spiral.
Bank of England on hold at 0.5% after this week's MPC meeting, and the asset purchase program suspended for the second month at £325bn.
UK PMI services steady at 53.3 in May, still the equal softest reading for the year so far. The BRC reported same store sales up 1.3% yr in May, as the weather improved from miserable April when sales were down 3.3% yr. The Halifax reported house prices up 0.5% in May for a –0.1% yr annual pace, its least weak reading since late 2010.
Chinese data for May mostly came in below forecasts, providing retroactive justification for last week's interest rate cuts, the first since 2008. Consumer price inflation slowed from 3.4% to 3.0%, while producer prices were down 1.4%yr. Industrial production rose 9.6%yr, a pickup from April's 9.3% pace (which was probably aff ected by last year's Japanese tsunami), but fell short of the median forecast of 9.8%. Retail spending slowed from 14.1%yr to 13.8%yr. The exception was overseas trade, with exports (up 15.3%yr) and imports (12.7%yr) well ahead of forecasts and April's very weak results. New loans and money supply figures due this week are expected to show a small uptick from April.
AUD and NZD Outlooks: The primary dynamic driving markets today will be the weekend's Spanish bailout news – a positive for the currencies. Trading conditions will be thin until Asia opens with Australia on holiday.
NZD/USD 1 day: This corrective rally can push to the 0.7810-0.7850 area.
NZD/USD 1 month: Below 0.7300.
NZ 2yr swap yield: Opening today above 2.60%.
AUD/USD 1 day: The corrective rally since 1 June will probably extend further during the next day or two to above 1.0000.
AUD/USD 1 month: Below 0.9500
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