It is not so much about the US dollar today, though the pullback in US Treasury yields may have helped spur the heavier tone against the yen after reaching seven-week highs yesterday. The bigger moves have been sparked by unexpected news from Australia and New Zealand.
The Reserve Bank of New Zealand, as widely expected, left the cash rate on hold. The market had previously had around 50 bp more tightening priced into the 12-month OIS than the RBNZ had signaled. Yet instead of pushing against the market's aggressiveness, RBNZ Governor Wheeler had his own hawkish statement. Interest rate increases "will likely be required next year". The New Zealand dollar quickly rallied nearly 1% against the dollar to $0.8150 before pulling back. It made another attempt at the highs in the European morning, but the momentum faltered and consolidative action has taken place near the highs.
If the RBNZ is likely to hike rates in Q1 next year, there still is a risk the its Australian cousins may be forced to cut rates again. The weaker than expected Australian jobs report is forcing the market to reconsider the rate increase it was anticipating in H2 2014. This saw the Australian dollar reverse sharply lower. In fact, the Aussie first traded above yesterday's highs and then broke below the lows. The highs for the best in three months and a close below yesterday's lows (~$0.9277) would a technical key reversal. That said, the Australian dollar has rallied from $0.89 at the start of the month to $0.93505 earlier today without much of a pullback. The first retracement objective comes in near $0.9180 and then $0.9125.
The disappointing details included a loss of 10.8k jobs instead of a net gain of 10k that the market expected and the July series was revised to show 11.4k jobs lost instead of 10.2k. Full-time employment fell for the third consecutive month (2.6k). Even with further erosion in the participation rate (to 65.0 from 65.1), the unemployment rate ticked up to 5.8% (from 5.7%).
News from Japan was also disappointing. July machine orders were expected to show a rebound from the 2.7% decline in June. The Bloomberg consensus was for a 2.4% increase. Instead it came out flat. There had been a surge of 10.5% in May and the optimists argue that these are simply corrections to that. They would point to the fact that the year-over-year rate improved to 6.5% from 4.9%. However, even they cannot be quite as confident about the outlook for capex. This component of the next Tankan survey (October 1) will be important.
Local reports indicate that PM Abe has already decided to allow the retail sales tax increase from 5% to 8% to go into effect April 1, but will not formally make the announcement until after the Tankan survey. Abe is also reportedly supportive of the JPY5 trillion supplemental budget.
Separately, the MOF weekly flow report showed Japanese investors sellers of foreign bonds for the fourth consecutive week. This were partially offset by purchases of foreign shares. Foreign investors bought Japanese shares for the first time in three weeks though this was matched almost yen-for-yen by the sales of Japanese bonds. The dominant flow was JPY1.39 trillion purchases of Japanese bills.
European activity has been less eventful. The one surprise was Italy's industrial production fell in July, snapping two months of gains. The sharp 1.1% decline contrasts with expectations for a 0.3% gain. The June gain itself was shaved to 0.2% from 0.3%. Italy's industrial output is 4.3% below a year ago, doubling the 2.1% pace of the June contraction.
In some ways, however, Italy's data was consistent with many other euro area members' disappointing industrial production figures, including Germany. Still, the magnitude of the contraction in the area as a whole is notable, especially given the recovery anticipated by survey data. July industrial output fell 1.5%. The market had expected a 0.3% decline. The year-over-year contraction deepened: - to 2.1% from -0.4%.
Separately, the August inflation figures from Spain and France follow yesterday's final German report and confirm that price pressures remain subdued in the region. Of note, using EU harmonized measure, French inflation is running about 0.6% below Germany's on a year-over-year basis, though its 10-year yield is about 45 bp more, implying that French real rates are 100 bp on top of Germany.
The US reports weekly jobless claims and import prices. The former is less significant as it follows last week's month report and does not cover September's survey period. Jobless claims did fall to a new cyclical low the previous week, which may have been related to the Labor Day holiday. If this is indeed the case, a small increase should not be surprising. Imported prices are expected to have risen by about 0.5% and any significant surprise may impact expectations for tomorrow's PPI report.
Lastly, we note that the S&P 500 will begin today on a seven session advancing streak. The MSCI Emerging Market equity index is a bit lower now, but it has been up for six sessions coming into today. The MSCI Asia-Pacific Index is ending its 9-session advance, with a marginal loss. The Dow Jones Stoxx 600 is snapping a six-session advance, but the technicals seem to be more vulnerable, as they are flirting with yesterday's lows.