by: Saxo Bank
Fed chief Ben Bernanke, in his testimony before the Joint Economic Committee, tended to focus on some positives in the US economy, suggesting once more that “green shoots” may be evident given that the pace of contraction may be slowing and the housing sector may be bottoming. He outlined 3 reasons to suggest an increase in activity later this year namely, an end to inventory shedding, stability in the housing market and the impact of fiscal and monetary policy on final demand. However, there were also certain caveats in the prepared speech, namely concern about weak business investment, the poor state of the commercial real estate sector and the potential for the jobless rate to hit 10% in 2010. The speech also contained reference to the US bank stress tests but merely confirmed the program and outlined its objectives. There was no reference to the results, which are due to be published tomorrow.
Talk on the US bank stress tests was left to the markets to disseminate, with a newswire report, subsequently carried in the WSJ, that BoA would need to raise a staggering $34-35 billion in cash doing the rounds early in the Asian session. This is dramatically higher than the $10 bln already touted in the press, and knocked risk appetite for six and the dollar extended its rally at the expense of the “risk” currencies while US stock index futures fell almost 1%. While BoA was grabbing the headlines for its balance sheet deficiencies, it was also in the news on reports it was considering offloading a third of its 16.7% stake in China Construction Bank following the expiration of a lock-in period. At last night’s closing prices, the value of the stake for sale was estimated at $8.3b.
Fed officials all seem to be singing from the same hymn sheet at the moment, with San Francisco Fed President Janet Yellen saying she could see “basis for optimism” about the economy with a chance of slow growth in the second half of 2009. Consumer spending and falling inventories were bright spots but cautioned that the unemployment rate understates the magnitude of the down labour market. In all, the tone of the speech matched that of an earlier one by Minneapolis Fed Chief Gary Stern.
Australian data releases looked to confirm the view that recent policy initiatives are gaining traction. Retail sales posted a strong rebound in March, rising 2.2% m/m vs. an expected 0.5% increase and +2.0% the previous month, while Australia’s trade performance in the same period was much better than expected. The trade balance posted its eighth straight month of surpluses and was much higher than the A$1.7b expected, coming in at +A$2.49b, but analysis showed that the improvement came from a drop in imports rather than better exports. At the time of the data release, the market was more preoccupied with the BoA capital story and AUD was not able to gain any benefit.
GBP has been one of the better performers in currency markets of late, one suspects with the added impetus of a short-squeeze as well as slightly better UK data. The PMI data series continues to surprise to the upside and April consumer confidence enjoyed its monthly gain in two years with the nationwide index rising to 50 from 42 in March. The expectations component showed the biggest improvement, rising 13 points to 70 while the present situation and spending indices each rising a smaller 1 point. The UK’s NIESR also suggested that the worst may be over for the UK economy with a low in Q1 and growth emerging in Q4. The think tank slashed its 2009 growth forecast to -4.3% from -2.7% forecast in February. It raised its 2010 forecast to +0.9% from +0.1% previously but cautioned that the return to growth was contingent on stronger exports.