Article by Ron Daulton

Market wrapRisk sentiment rebounded during the NY session. While the decent mix of US data may have contributed, there was no obvious catalyst for the 1.5% intraday surge in US equities, apart from bargain hunting after a weak start to May. The S&P500 is currently up 0.4%. Earlier, during the London session, China announced a 50bp increase in bank reserve requirements to a 21% record, and Cisco forecast profit and sales would miss consensus, both news items causing a brief and minor selloff. Commodities weakened further in London but rebounded in NY, the CRB currently up 0.1%, with oil +0.7%, copper +2.0%, but silver -2.3%. The US 10yr treasury yield is 7bp higher at 3.23%, forming a technical reversal formation with higher yield implications. An auction for 30yr treasuries went poorly, yielding 3bp above market with a sub-average 2.4 bid-cover ratio and low offshore interest. Norway’s central bank hiked its policy rate 25bp to 2.25% as expected.

The US dollar index continued higher until mid-morning London, correcting slightly early NY. EUR dipped further in London to 1.4124 and then corrected to 1.4277. EU finance head Juncker’s admission he lied about a meeting on Greece to contain the market may have added to the early negative EUR sentiment. USD/JPY was directionless inside a 80.70-81.30 range. AUD suffered further in the wake of a disappointing employment report, reaching 1.0567 in London, but recovering to 1.0700 in NY. NZD outperformed, mainly due to AUD/NZD cross selling and flow, rising from a London low of 0.7840 to 0.7992. AUD/NZD ground to 1.3500 in London but fell to 1.3350 in NY.

Economic wrapUS retail sales rise 0.5% in Apr and Mar revised up sharply from 0.4% to 0.9% (largely due to higher auto & gasoline sales). Excluding those two factors in Apr, sales were up just 0.2%, the slowest gain for the year so far, suggesting that higher gasoline and food prices might be crimping spending in other areas. The breakdown showed falling sales in furniture, electronics, health, sporting goods, department stores & restaurants. In other news, a 0.9% rise in retail inventories contributed to a 1.0% business inventories gain in Mar.

US PPI up 0.8% in April. This reflected a further 2.5% surge in energy prices, and 0.3% rises in food and core prices. That later gain was due in part to ongoing rises in the usually volatile auto and light truck components, and could be a function of emerging shortages due to parts supply problems consequent upon the Japanese earthquake and tsunami – something to watch out for in Friday’s CPI data.

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US initial jobless claims fall 44k to 434k in the first week of May, reversing most of the late April spike in claims which the Labor Dept had attributed mostly to one-off factors. That still leaves claims higher than they were a month ago (sub 400k), just prior to the monthly non-farm payrolls survey week.

Fedspeak: The Philly Fed’s Plosser said “if the economy continues to make progress, then monetary policy will need to exit from its extraordinary accommodation in the not too distant future… the risks to the inflation outlook are tilted to the upside”.

Euroland industrial production fell 0.2% in March, the first decline since September last year. Germany and Italy both recorded 0.4% gains but France and Spain were both down by around 1.0%.

UK industrial production rose just 0.3% in March, after falling 1.2% in Feb. There were only partial rebounds in the mining, oil and utility components that fell sharply in Feb, and factory output rose just 0.2% after Feb’s flat outcome. Still. the ONS has said the data are not soft enough to require a downward revision to the first estimate of Q1 GDP growth.

Canadian new house prices flat in Mar, their first month without a gain since Oct-10.

Market outlookAUD/USD and NZD/USD outlook next 24 hours: AUD is unlikely to fall below 1.0570 today, 1.0700 above also containing price action. NZD’s surprising bounce last night is unlikely to be sustained, so a 0.7850-0.8000 range should contain today. US inflation and consumer confidence data tonight are potential market-movers.

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