The equity markets fell as investors became connizant of a potential deflationary and low growth environment in the US. Fed Governer Fisher’s comments that the US needs to bolster their quantitative easing program to avoid a Japan like situation, scared market participants. The S&P 500 Index dropped 5 points to settle at 1102.Initial claims for jobless benefits declined by 11,000 to 457,000 in the week ended July 24, the Labor Department said in its weekly report Thursday. The decline beat expectations of economists polled by Dow Jones Newswires, who had predicted claims would fall by only 4,000. However, the previous week’s level of claims was revised upward, from 464,000 to 468,000. The four-week moving average — which aims to give a better idea of the trend by smoothing volatility in the data — fell by 4,500 to 452,500 in the week ended July 24. The prior week’s average was revised to 457,000.
Euro zone and UK economic releases were mixed today. Data surprises have swung sharply in favor of the euro and away from the dollar in recent weeks. EMU economic confidence came out at 101.3 compared to the 99.1 expected by economists. Indeed, that has been one of the factors behind the euro’s recovery. Perhaps as the economic surprise factor moves away from favoring the euro, that would also coincide with some eventual topping action for the euro. In the UK, the nationwide housing index decreased by -.5% compared to the -.3% which was expected by the market.
The RBNZ hiked rates 25 bp to 3% late yesterday, as expected. Despite being only the second hike in the current tightening cycle, the RBNZ sounded a dovish note and said that the pace of future hikes may be more moderate than was projected in its June statement. Gov Bollard noted that the outlook for NZ growth has softened somewhat, but that it is still appropriate to remove accommodative policy. He added that future prospects for growth had deteriorated, and that recent NZD gains are inconsistent with this as well as the decline in NZ export prices.
Italy’s lower house passed a 2-year austerity plan that aims to cut its budget gap by EUR25 bln. In addition, Italy approved the European Financial Stability Facility and so that EUR440 bln fund is now authorized to sell debt backed by sovereign loan guarantees. That money would then be used to help member countries in trouble. Ironically, the euro today has just broken the post-EFSF high from May 10 around 1.3090. So far, no follow-through buying has been seen but momentum is clearly on the euro’s side right now and so further dollar losses are likely near-term. But it’s no slam dunk, as the euro uptrend has been painfully slow since mid-July. And we note again that 3-month EURIBOR has continued to creep higher every day this week, so all is not entirely right yet in the euro zone banking system. Italy 10-year bonds are outperforming today, with spreads to Germany flat even as Greece widens 3 bp, Ireland widens 8 bp, Portugal widens 5 bp, and Spain widens 4 bp. S&P said that its A+ rating on Italy is supported by the fiscal package.