Financial Resource

Article by Ron Daulton

Market wrapThe markets closed the week in a risk seeking mood. A meeting of G8 leaders said the global economy was strengthening, helping investor confi dence. US data was as expected for personal spending, beat consensus for consumer confi dence, but missed estimates for pending home sales. The S&P500 closed up 0.4%, and commodities were up 0.9% (CRB). Copper was 1.8% higher, and oil was +0.4%. US 10yr treasury yields closed off the day’s low of 3.05% at 3.07%. Giant bond fund PIMCO’s Bill Gross said German and Canadian bonds were better value than US treasuries.

The US dollar under performed, the DXY index down 1.1%. EUR dipped to 1.4184 early London but gained thereafter to 1.4324, buoyed by an FT article saying EU banks could avoid parts of the Basel III capital accord. It opens in NZ this morning at 1.4325, untroubled by an article in Der Spiegel on Sunday claiming (and denied by the IMF) Greece had missed all its fi scal targets. The Swiss franc outperformed, USD/CHF falling from 0.8596 to 0.8465. USD/JPY fell from 81.30 to 80.70 after rallying early London on Fitch’s revision of the country’s AA- outlook from stable to negative. AUD rose from 1.0648 to 1.0717, trading to 1.0730 at the NZ open this morning. NZD failed to make further headway after touching 0.8200 on Friday afternoon, ranging between 0.8140 and 0.8193. AUD/NZD ranged sideways around the recent low, between 1.3060 and 1.3110.

Economic wrapUS core PCE deflator up 0.2% in April. After running between 0-0.1% per month through most of 2010, this inflation measure has posted three out of fours 0.2% gains so far this year, though all have been a little below 0.2% before rounding. That provides further comfort that deflation risks have receded, although the accompanying personal spending fi gures were on the soft side of expectations. Spending growth was revised down a tick in March to 0.5%, and April’s 0.4% was the equal lowest pace recorded since November last year. Personal income growth was steady at 0.4%.

US pending home sales fell 11.6% in April, to the lowest level since September last year. The midwest, south and west all down saw sales drop sharply, but the northeast was up slightly. Very wet weather across the country and especially severe flooding in the south will have been a factor hitting sales but may not explain all the weakness. Sales are now down 27% on April last year, when the home buyer tax credit expiry saw sales jump temporarily.

US consumer sentiment was revised up 1.9 pts to 74.3 in the fi nal Uni of Michigan read for May, roughly evenly split between the expectations and current components. Both 1 and 54 year inflation expectations were revised lower. These outcomes are consistent with the drop in gasoline prices over the past week or so.

Euroland confi dence indicators weaker in May. The business climate index fell from 1.28 to 0.99, its lowest in six months, while economic confi dence fell for the third month running, down 0.6 pts to 105.5 (from Feb’s 108.0 peak). In April, money supply M3 growth slowed from 2.3% to 2.0% yr although loans to the private sector saw growth edge up from 2.5% to 2.6% yr. Mixed at the margin, still very weak overall.

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German inflation slowed from 2.4% to 2.3% yr in May, but the EU harmonised measure fell from 2.7% to 2.4% yr, so Tuesday’s Euroland CPI should certainly ease back.

UK consumer confi dence jumped from -31 to -21 in May, the biggest jump in 18 years, though the Royal Wedding, sunny weather and the string of late April-early May bank holidays probably explained part or even much of the rise, beyond normal seasonal shifts. Other data included a 0.3% rise in house prices in May, according to the Nationwide, for a -1.2% yr annual pace.

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