The US dollar index made a multi-week low ahead of the US data

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Risk appetite remained upbeat after decent US economic data covering retail sales, PPI, and inventories. The S&P500 was up 0.4% just before the US central bank’s meeting, and is currently up 0.5%. The Fed did not alter the statement on QEII, and its assessment of economic conditions was largely unchanged, perhaps marginally more upbeat. The CRB commodities index is unchanged, trying to break above the two-year high made in Nov and early Dec. The US 10yr treasury yield hovered around 3.28% until the US data, rising to 3.39% before the Fed meeting, and spiking to 3.42% immediately afterwards. Also supporting yields was an influential advisory’s report that the four new Fed voters next year had a hawkish bias. The Eurozone debt markets has a moderately risk averse tone, Irish 10yr government bonds underperforming German equivalents by 7bp. Belgium’s sovereign rating outlook was lowered from stable to negative by Standard & Poor’s, the country’s political stalemate cited as a risk to addressing its public debt.

The US dollar index made a multi-week low ahead of the US data, then recovering for little net change. EUR did the reverse, making a multi-week high of 1.3500 around noon Europe, before slipping to around 1.3400. GBPwas the session’s underperformer, falling from an intraday peak of 1.5910 to 1.5750. USD/JPY dipped below 83.00, but recovered to 83.50. AUD rose from the Sydney close in a choppy manner to 1.0029 after the Fed meeting, making a onemonth high. NZD made a high of 0.7576 in Europe but is back at 0.7540. AUD/NZD held its gains post NZ-retail sales, consolidating around 1.3270.

The FOMC contained no surprises with only very minor changes to the statement. The Board reasserted their plans to buy $600bn in Treasuries, that policy will remain “exceptionally accommodative” for an “extended period” and that they will employ all their policy tools as necessary to support the recovery. The FOMC repeated that low underlying infl ation and the high unemployment are not consistent with their dual mandate. Meanwhile, Hoenig remains a dissenter. The only shift will be found in the opening paragraph and the changes here are cosmetic – reframed slightly to acknowledge that their is at least some growth coming through. For example, the “recovery is continuing” replaces “the pace of recovery in output and employment continues to be slow” and on consumer spending the pace has been upgraded to “moderate” versus “increasing gradually”. However, the recognition of growth is tempered by a new statement that the pace of the recovery has been “insuffi cient to being down unemployment”.

US retail sales came in stronger than expected at 0.8% in Nov with an upward revision to 1.7% from 1.2% in Oct. The report was stronger across the board with ex-autos up 1.2% (from 0.8%) and ex-autos and gas up 0.8% for the second consecutive month. Stripping out autos, gasoline and building material (the measure used for GDP), sales were up 0.9% suggesting upside risk for Q4 GDP given two months worth of robust consumer spending data.

US PPI also came in above expectations with the headline rising 0.8% in Nov although the annual rate slowed to 3.5% from 4.3%. The core rate rebounded 0.3% on the month but also slowed on an annual basis to 1.2% from 1.5%. The headline was boosted by a rise in the usual suspects of food and energy prices but in the core measure, there were broad based (but small) increases in the majority of components.

US business Inventories rose 0.7% in Oct, below consensus of 1.0% although there was an upward revision to the Sep data to 1.3% from 0.9%. The slightly softer data was driven by a large decline in retail inventories (0.6%) due to the strong retail sales numbers for the month but manufacturing (0.9%) and wholesaling (1.9%) managed decent gains.

US NFIB small business optimism rose to 93.2 in Nov – the highest level since Dec 2007 and its fourth consecutive monthly rise. There was particular increases in the expectations for the economy (+16% from +8%), plans for expansion (+9% from +7%) and hiring (+4% from +1%). The index, however, remains a way off its long-term average of 98.4.

German ZEW current conditions rose for the sixth consecutive month and is approaching the peak experienced before the GFC in 2007 (88.7). The expectations component came in higher than consensus at 4.3.

UK CPI posted yet another upside surprise in Nov rising 0.4%. The annual rate increased to 3.3% and has now been at or above 3.0% since the start of this year. The core rate remained steady at 2.7% while RPI (4.7% from 4.5%) and RPIX (4.7% from 4.6%) both nudged higher.

Outlook

AUD/USD and NZD/USD outlook next 24 hours: AUD is overbought intraday, but pullbacks should be limited to 0.9965 support, the next upside target 1.0070. NZD is rangebound today between 0.7485 trend support and 0.7580. Fonterra’s milk powder auction tonight poses upside risk.

http://www.westpac.co.nz/