Markets Today: .007 proves Bond bearish (and USD bullish)

If US April core CPI had printed just .007% lower than the 0.256% it actually did, it would have been rounded down to 0.2% on the month not up to 0.3%, and arguably most of Friday’s market price action wouldn’t have occurred.

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If US April core CPI had printed just .007% lower than the 0.256% it actually did, it would have been rounded down to 0.2% on the month not up to 0.3%, and arguably most of Friday’s market price action wouldn’t have occurred.

As it was, almost all the offshore price action in FX and rates came in the immediate aftermath of the CPI release, which kept the annual core rate at 1.8% against expectations for a fall back to 1.7%. Despite the exaggeration caused by the rounding effect, a lot is being made of the fact that core CPI has run at a 2.6% annualised rate in the last three months.

The biggest driver of CPI was ‘owners’ equivalent rent’ and which makes up 31% of core CPI. This rose by 0.3%.  There was also a big jump in medical services ((+0.9%) led by a 1.7% jump in hospital costs. Health insurance costs also rose quite strongly.   The overall sense here is that the ongoing impact of lower oil prices on inflation in general, and of dollar strength on tradeable goods prices in particular, is no longer sufficient to prevent core inflation rising and led by services.

A few hours after CPI, Fed chair Yellen says she still expected to take a first step toward policy normalisation later this year. Her remarks appeared to underpin rather than exacerbate the earlier back-up in US yields and the significantly stronger dollar.

In FX, DXY added 0.8% to 96.01, its best level since 29 April, with EUR/USD -0.89% to 1.1013 (intraday low was 1.1004).  News that German chancellor Merkel and other EU officials had told Greek PM Tsipras in Riga this week that there could be no bailout deal without IMF approval, came too late in the day to be a EUR-negative factor. Overnight, we’ve had the Greek interior minister Nikos Voutsis telling Greek TV station Mega that Greece will be unable to meet pension and wage bills in June and also reimburse money owed to the IMF without a bailout deal with creditors (Greece owes €1.2bn to the IMF in June, in four €300mn instalments between June 5 and June 19).

GBP was Friday’s underperformer amongst the majors, down 1.1% to 1.5490, sentiment not helped by news, sent by email to the UK Guardian newspaper apparently in error, that the Bank of England was secretly researching the impact of a British exit from the EU (so called Brexit).

USD/JPY rose by ‘only’ 0.41% to Y121.54 but which marks a new cycle high for the Abe era.  It doesn’t look to have been directly impacted by a call from the IMF, in its latest ‘Article IV’ assessment of Japan published late Friday, for additional BOJ stimulus and stronger reforms.

AUD again underperformed NZD Friday amid some further paring of long AUD/NZD exposure (latter down to ~1.07 from 1.0850 earlier in the week). AUD/USD fell 0.92% to 0.7823 (its lowest close since 4 May), and has re-opened for the week barely changed.   NZD was -0.54% to 0.7309.

In bonds, we witnessed a bear flattener, with 2s +4.1bps to 0.6142%, 5s +5bps to 1.5617%, 10s +1.9bps to 2.2092%. In commodities, iron ore jumped by $2.05 to 59.96 but commodities in general, including oil, were weaker alongside a stronger dollar.

CoreLogic RP Data’s preliminary weekend housing market auction/price stats. show a rise in auction clearance rates but falls in prices on the week in both Sydney and Melbourne, so more (still tentative) evidence prices may be peaking.

Sydney’s auction clearance rate lifted to 86.9% from 85.5% but still down on two weeks ago, with prices -0.3% on the week – the first fall this year – and reducing the YTD rise to 6.6% from 6.9%.  Melbourne cleared a very high 80% of auctions (from 74.3%) but prices fell by 0.8% so reducing the YTD gain to 3% from 3.8%.  Nationally, the 7-cities clearance rate rose to 78.4% from 76.2%, with prices for the combined 5-capital cities -0.3% on the week and +3.1% YTD down from 3.4%.

Coming Up

It threatens to be a very quiet start to the week with US markets closed for Memorial Day and the UK for their Spring bank holiday. Today, we only have Japan trade data on the calendar.

Domestically, Thursday’s Q1 Capex data and the revised (2nd) estimate for 2015/16 will be the undoubted highlight. There is nothing due today in Australia or New Zealand, save we are on the lookout for Fonterra’ first forecast for 20125/16 milk prices – not that it will be bear much resemblance to the actual payout.

Internationally, it will be incoming US data that garners most attention, as well as the usual litany of Fed speakers. Data includes durable goods orders (tomorrow) consumer confidence and revised Q1 GDP.

Overnight

On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years +1.94bp to 2.21%. On commodity markets, Brent crude oil -1.76% to $65.37, gold-0.0% to $1,204, iron ore +3.5% to $59.96. AUD is at 0.7826 and the range since Friday’s local close has been 0.7811 to 0.7926.  Indicative range today 0.7800 – 0.7850 (For more market prices, please see p.2 of the pdf).

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