A Tale of Two Numbers

The juxtaposition of another significant downside Eurozone data surprise (German IFO) and a major upside surprise for US New Home Sales has – unsurprisingly – pushed the EUR below 1.28 against the US dollar for the first time since 10 July 2013.

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The juxtaposition of another significant downside Eurozone data surprise (German IFO) and a major upside surprise for US New Home Sales has – unsurprisingly – pushed the EUR below 1.28 against the US dollar for the first time since 10 July 2013. In truth most of the move lower in the EUR came on the US, not German, data.

These were the only two data points of note overnight, and where most markets are showing almost the complete opposite of moves we witnessed on Tuesday. Thus US equities have bounced back, US bond yields are higher and commodity currencies sit at the top rather than the bottom the FX leader board (BRL, AUD, ZAR, NZD and CAD in that order). The moves are aided by stronger metals prices (LMEX index +0.5%) and no further fall in iron ore. European currencies sit firmly at the bottom, with CHF, NOK, EUR, SEK and GBP showing losses of between 0.3% and 0.6%.

What the weak IFO business climate reading (104.7 from 106.3) has done is reinforce expectations for more aggressive action from the ECB, something which both the Eurozone bond and stock markets liked. US bonds in contrast suffered both from the strength of the US home sales data (to the highest level since January 2008) and a poorly received US 5-year note auction – the first since last week’s FOMC statement and the hit to bond prices from the Fed members’ median ‘dot point’ forecasts. The auction cleared 0.9bp higher than its 1pm level with the lowest bid-cover ratio (2.56) since July 2013. Stocks were evidently unperturbed by higher bond yields, liking the strong home sales data, with the major indices closing with gains of between 0.8% and 1% (the pharmaceuticals sector leading the way up just as they led Tuesday’s fall).

Yesterday, the AUD and local interest rate markets were largely unmoved on the revelation in the RBA’s six-monthly Financial Stability Review (FSR) that the central bank is now minded to embrace some form of macroprudential regulation of the residential mortgage market and was working with APRA to this effect. To the extent macroprudential regulation succeeds in taking heat out of the (investor) housing market and which the RBA now seems to think is at risk of taking on bubble characteristics in Sydney and Melbourne, this would allow them to keep rates ‘lower for longer’.

Coming Up

In the wake of yesterday’s FSR and references to the RBA working with APRA on potential measures aimed at cooling the investor housing market in Sydney and Melbourne, there is particularly keen interest in anything RBA Governor Stevens might have to say on the matter when he appears on a panel today at the Melbourne Economic Forum (12:30 AEDT). If anyone is expecting a detailed expose of what the RBA has in mind here (and bearing in mind it is APRA who have the responsibility for implementing macroprudential policy) they are prone to disappointment.

Any comments on the fall in the currency this month (that now runs to 6% against the USD) will also be of keen interest. If Mr. Stevens does choose to say anything about current levels, it is most likely to be to the effect that the AUD is still seen as somewhat overvalued.

Offshore this evening, US durable goods orders, weekly initial jobless claims and the Markit US services/Composite PMIs are the highlight. There’s nothing of great note in Europe.

Overnight

On global stock markets, the S&P 500 was 0.80% . Bond markets saw US 10-years 3.62 bp to 2.56%. On commodity markets, Brent crude oil moved 0.30% to $97.1, gold was -0.4% to $1218.6, iron ore moved 0.0% to $79.4. AUD is at 0.8887.

• German IFO Business Climate 104.7 (105.8E, 106.3P); Current Assessment 110.5 (110.2E, 111.1P); Expectations 99.3 (101.2E, 101.7P)

• US Aug New Home Sales 504k (430kE, 427kP revised)

• Fed’s Evans (dove) says if US dollar ended up very strong that would reduce inflation pressure. In no hurry to alter stance of policy.

• Fed’s Mester says she’d like to reformulate forward guidance away from calendar towards the economy; predicts 3% growth in H2 through 2016)

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