Markets Today: American Dream

The performer among major currencies has been the Canadian dollar where recent strong hints from Senior Deputy BoC Governor Carolyn Wilkins that the Bank of Canada is shifting to a ‘tightening bias’ given signs of an improving economy continues to resonate with markets.

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The Canadian dollar is up 0.16%, the Loonie also getting some boost during a session from oil prices that were bid higher, continuing the modicum of support seen through the APAC session yesterday. USD/CAD is trading at around 1.323 in early trade.  That’s nearly two big figures lower than last week.  The C$ OIS market is now 32% priced for a hike at the upcoming 21 July meeting, with that expectation rising to well over 50% by the 25 October meeting and fully priced by the last meeting of the year on December 6.

Meanwhile, a little money has drifted away from the USD in the lead up to tomorrow morning’s FOMC announcement, though US Treasury yields are little changed. The Bloomberg spot dollar index is down 0.20% and despite another strong NFIB Small Business Optimism Index for May.  It also comes amid testimony to the Senate Intelligence Committee from US Attorney General Jeff Sessions, Sessions saying the notion he colluded with Russia a “detestable lie”, also saying he had some concerns over Comey.

On the economy front, the NFIB Optimism Index for May was at a still strong 104.5, exactly as expected and as it was last month.  Small business activity and optimism looked to be lagging the US growth story but that has not been the case since last year’s US Presidential election.  Before the election, the Index was 94.5 and jumped shortly thereafter.  How much of this reflects the tenor of underlying US small business activity levels and how much hopes for Trump policy reflation remains unclear, though the latter is still evident.

NFIB President and Chief Executive Juanita Duggan thinks the Trump policy factor and hopes for high growth is still alive and well among NFIB members: “The remarkable surge in optimism that began last year right after the election shows no signs of slowing down. Small business owners are highly encouraged by the President’s regulatory reform agenda, and they remain optimistic there will be tax reform and health-care reform. This is a policy-driven phenomenon.”

We would also note that the survey is reporting stronger levels of compensation, up 2% points to 28, while “plans to increase compensation” was steady at 18, though that is up from last year’s (15) as actual compensation is.  That won’t be lost on the Fed, suggesting that the mini-slowdown in payroll average hourly earnings may yet be temporary.

Along with the CAD, the Pound has had a better night for once, up 0.19%.  The UK CPI was up to 2.9% y/y from 2.7%, and this is remains a worry for the UK wage earner with nominal wages barely growing above 2%, an update out tonight in the monthly labour market report.  The Conservatives are yet to come to a formal agreement with the DUP to form government.

The AUD has been steady to a fraction lower overnight though not breaking out of its recent range.  It’s tested lower overnight toward 0.7525, having hit its high yesterday just above 0.7560 in the immediate aftermath of yesterday’s still upbeat NAB Business Survey for May.  While oil had a better night it was mixed to lower among other key $A-related commodities.  Iron ore took another hit yesterday, down $1.51/t, off 2.75% to $53.36, the lowest daily set in this down move.  LME Copper was also down 0.95%, gold steady, ditto for met coal while the daily Newcastle steaming coal benchmark price is up 1.76% to $80.85.

Coming Up

Aside from this morning’s Westpac Consumer Sentiment Survey (10.30) and lunchtime’s China activity data for May (12.00), the market is setting its sights on tomorrow morning’s FOMC announcement.  The divide between the upbeat business sector and a rather disheartened household sector was a thematic from yesterday’s NAB Survey and we will be looking at today’s Consumer Sentiment Survey also from that perspective.  (REINZ housing is being released as we go to print.)

US interest rate markets are fully priced for a hike tomorrow (taking Fed funds up to 1.00-1.25%), but only half priced for one more by the end of this year just shy of the March Fed’s own median forecast of another by year end.  But thereafter the Fed’s dot points and market pricing clearly diverge, the Fed’s median for the end of 2018 requiring three more to 2.00-2.25% against market pricing of just over 1.5%.  Other watch points tomorrow morning will be statements on running down the Fed’s balance sheet and the extent of views on recent softer inflation and wages.  US CPI and Retail Sales for May are out first thing in the US session and will be late mail for the Fed to consider during their morning deliberations.

Today’s China activity reports are expected to reveal little change in annual growth of Industrial Production, Retail Sales and Fixed Assets Investment.  (Chinese lending data for May are still awaited, due any day now.)  The May PMIs was little changed in May.

Overnight

On global stock markets, the S&P 500 was +0.45%. Bond markets saw US 10-years -0.36bp to 2.21%. In commodities, Brent crude oil -0.23% to $48.18, gold-0.0% to $1,266, iron ore -2.8% to $53.36, steam coal +1.8% to $80.85, met. coal -0.3% to $143.50. AUD is at 0.7537 and the range since yesterday 5pm Sydney time is 0.7524 to 0.7565.

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