Markets Today: (Any) Heartache tonight (?)

It was an eventful news day for the AUD yesterday, even if the currency was little changed, and is not breaking new ground this morning, S&P yesterday changing the outlook on Australia’s AAA rating from stable to negative.

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It was an eventful news day for the AUD yesterday, even if the currency was little changed, and is not breaking new ground this morning, S&P yesterday changing the outlook on Australia’s AAA rating from stable to negative.  They cited fiscal outlook concerns, that fiscal consolidation could be further postponed.  The agency also cited downside risks to the revenue forecasts in the Budget from their own forecasts of a lower iron ore price and the risk of persistent low price and wage inflation.

The AUD/USD dipped from what at the time was a mini rally in place up to 0.7535/40, quickly reversing by over ½ a cent, that was just as quickly snuffed out by renewed buying up through 0.75 again.  Of course, the announcement did not come out of the blue, the market waiting for a statement from S&P after the election.  (Earlier NAB research also indicated that for G10 currencies, there isn’t any significant or sustained negative FX impact from negative ratings actions.)

The AUD has settled back not far below 0.75 this morning amid overnight weakness in oil prices (WTI and Brent off 4¾%), weighing on US energy stocks despite EIA measures of inventories falling in line with expectations but much less than the API expected that bolstered expectations for a larger drawdown.  Swimming against a softer commodity-induced tide is the NZD benefiting from concerns raised yesterday by RBNZ Deputy Governor Spencer on house prices, suggesting less risk of lower rates.  The AUD/NZD sits in the mid 1.03s this morning the lowest level since April 2015.  The yen and the USD remain bid.

Sterling is trading near its lows of recent days; the Conservative Party narrowing its leadership candidates to two, Theresa May and Andrea Leadsom.  It’s been a similar soft story for the Euro, Germany reporting weaker than expected May industrial production and the EU Commission threatening fines for Spain and Portugal for excessive deficits, to be discussed at next week’s EU FinMin meeting.  For what it’s worth, the private sector US ADP employment report for June ahead of payrolls tonight was a little stronger than expected and weekly jobless claims into the first week of July remained low at 254K.

Coming up

It’s a very light event schedule today.  Japanese balance of payments and labour earnings for May are followed in the European session by German current account and UK trade (both also May).

Then it’s full attention on payrolls, with the employment component of Wednesday night’s ISM Non-manufacturing report for June suggesting the number will be a little higher in underlying terms than in April/May when payrolls rose by a monthly average of 81K, but not significantly so.  (The low 38K May result would have been around 35K higher but for the Verizon strike, the unwinding of which should be present in tonight’s report.)  The Non-manufacturing ISM read on employment was only marginally higher, and the US Help-Wanted index fell further, pointing to some uncertainty on the rate of job hiring in coming months, including in June.  The market is expecting a rise in headline payrolls of 180K and an unemployment rate of 4.8% after May’s 4.7% reading; that consensus payrolls growth is looking a tad ambitious.  The market will also be keenly interested in earnings that are expected to have risen another 0.2% m/m, lifting annual growth from 2.5% to 2.7%.  It’s going to require a clearly strong report tonight (and for the next month or two) to convince the market that a near term rate hike looks reaslistic.

Canada also publishes its June employment report tonight, with a flattish report the consensus.  Employment growth of just 5K is tipped with the unemployment rate up from 6.9% in May to 7.0% in June.

Overnight

On global stock markets, the S&P 500 was -0.09%. Bond markets saw US 10-years +1.84bp to 1.39%. In commodities, Brent crude oil -4.67% to $46.52, gold-0.3% to $1,363, iron ore -1.5% to $55.07. AUD is at 0.7475 and the range since yesterday 5pm Sydney time is 0.7473 to 0.7536.

Good luck.

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