Markets Today: Budget Neutral

Virtually no market reaction in offshore markets to last night’s Federal Budget, which has seen Fitch and Moody’s quickly out affirming their prevailing AAA sovereign ratings. We haven’t yet heard from Standard & Poor’s.

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There was a quick dip in AUD/USD at 7:30pm last night down through the lows seen shortly after yesterday’s poor retail sales data, seemingly on the announcement that the current year ‘underlying cash balance’ and ‘net operating balance’ were both a bit more negative than in last December’s MYEFO.  But this quickly reversed when the numbers over the forward estimates (through 2021) were seen to ahead slightly better than MYEFO (and indeed the net operating balance is now projected to return to surplus in 2019-20 not 2020-21 – this is as the full effects of the additional revenue seen accruing from the extra Medicare surcharge from 2-2.5% and levy on the banks supports revenue, while additional infrastructure spending holds up the cash balance relative to the net operating balance since the latter only captures recurrent expenditure. The ratings affirmation also helped.

Yesterday’s retail sales numbers, showing a 0.1% drop in March with February revised down to -0.2% and Q1 real spending of just 0.1%, suggest downside risk to earlier Q1 GDP estimates and took an immediate bite out the AUD. AUD/USD fell to 0.7364 immediately after the numbers and then leaked to 0.7335 ahead of the Budget following which we saw a low of 0.7329, the lowest since January 9th this year.

While commodity prices falls and then the weak retail sales numbers have been the local drivers of AUD’s fall from grace, on-going revival in the US dollar’s fortunes is also part of the story. The BBDXY dollar index added almost 0.5% over the course of Tuesday. The fresh grind higher in US treasury yields is the key driver (10s now back at 2.4%), alongside further slippage in EUR/USD post-Sunday’s French election win for Emmanuel Macron.  June Fed tightening odds are now sitting at around 80%. The Fed’s Esther George, a note hawk, last night said she saw risks in delaying rate hikes. Both she and Eric Rosengren said they favoured beginning the process of balance sheet normalisation this year.

US data saw the JOLTS (job-opening) unchanged but still at a very elevated level, while the NFIB small business optimism survey came in at a still very strong 104.5, down from 104.7 but above the 104.0 expected. The optimism of Donald Trump supporters, heavily represented in the NFIB survey, is so far undimmed.

Coming Up

Budget digestion might give way to indigestion at some point today. Market radars will though be attuned to any comment from Standard & Poor’s on the sovereign rating. After Fitch and Moody’s were both quick to affirm the AAA rating last night and given the top line projections for return to surplus at or quicker than last December’s MYEFO, we suspect that at worse S&P will merely reaffirm the negative outlook they put in place last July.

Data wise today, we get April consumer confidence, which will garner more than the usual amount of attention after the back-to-back weak retail sales numbers reported for both February and March. Will this be reflected in a still-subdued consumer confidence reading, in contrast to the on-going pick up in business confidence evident in the NAB surveys? See Chart of the Day.

China is also a focus with latest CPI and PPI data this morning, which come as concerns that tighter monetary conditions in China are already being reflected in weaker (soft) activity readings such as the PMIs, and might be one of the underlying causes of recent commodity price weakness. An upside CPI surprises today would not be welcome in this respect, but a rise to just 1.1% from 0.9% as is the market consensus would hardly constitute a worry.

Offshore tonight, ECB President Mario Draghi is due to speak to the Dutch parliament  though this is unlikely to be the place – or the time – to discuss shifting language on economic risks and ECB policy prospects.

Overnight

On global stock markets, the S&P 500 was -0.15%. Bond markets saw US 10-years +1.27bp to 2.40%. In commodities, Brent crude oil -0.47% to $48.87, gold-0.6% to $1,220,  iron ore -1.6% to $60.75, steam coal -0.5% to $73.85, met.coal +1.4% to $177.00. AUD is at 0.7341 and the range since yesterday 5pm Sydney time is 0.7329 to 0.7399

There was a quick dip in AUD/USD at 7:30pm last night down through the lows seen shortly after yesterday’s poor retail sales data, seemingly on the announcement that the current year ‘underlying cash balance’ and ‘net operating balance’ were both a bit more negative than in last December’s MYEFO.  But this quickly reversed when the numbers over the forward estimates (through 2021) were seen to ahead slightly better than MYEFO (and indeed the net operating balance is now projected to return to surplus in 2019-20 not 2020-21 – this is as the full effects of the additional revenue seen accruing from the extra Medicare surcharge from 2-2.5% and levy on the banks supports revenue, while additional infrastructure spending holds up the cash balance relative to the net operating balance since the latter only captures recurrent expenditure. The ratings affirmation also helped.

Yesterday’s retail sales numbers, showing a 0.1% drop in March with February revised down to -0.2% and Q1 real spending of just 0.1%, suggest downside risk to earlier Q1 GDP estimates and took an immediate bite out the AUD. AUD/USD fell to 0.7364 immediately after the numbers and then leaked to 0.7335 ahead of the Budget following which we saw a low of 0.7329, the lowest since January 9th this year.

While commodity prices falls and then the weak retail sales numbers have been the local drivers of AUD’s fall from grace, on-going revival in the US dollar’s fortunes is also part of the story. The BBDXY dollar index added almost 0.5% over the course of Tuesday. The fresh grind higher in US treasury yields is the key driver (10s now back at 2.4%), alongside further slippage in EUR/USD post-Sunday’s French election win for Emmanuel Macron.  June Fed tightening odds are now sitting at around 80%. The Fed’s Esther George, a note hawk, last night said she saw risks in delaying rate hikes. Both she and Eric Rosengren said they favoured beginning the process of balance sheet normalisation this year.

US data saw the JOLTS (job-opening) unchanged but still at a very elevated level, while the NFIB small business optimism survey came in at a still very strong 104.5, down from 104.7 but above the 104.0 expected. The optimism of Donald Trump supporters, heavily represented in the NFIB survey, is so far undimmed.

Coming Up

Budget digestion might give way to indigestion at some point today. Market radars will though be attuned to any comment from Standard & Poor’s on the sovereign rating. After Fitch and Moody’s were both quick to affirm the AAA rating last night and given the top line projections for return to surplus at or quicker than last December’s MYEFO, we suspect that at worse S&P will merely reaffirm the negative outlook they put in place last July.

Data wise today, we get April consumer confidence, which will garner more than the usual amount of attention after the back-to-back weak retail sales numbers reported for both February and March. Will this be reflected in a still-subdued consumer confidence reading, in contrast to the on-going pick up in business confidence evident in the NAB surveys? See Chart of the Day.

China is also a focus with latest CPI and PPI data this morning, which come as concerns that tighter monetary conditions in China are already being reflected in weaker (soft) activity readings such as the PMIs, and might be one of the underlying causes of recent commodity price weakness. An upside CPI surprises today would not be welcome in this respect, but a rise to just 1.1% from 0.9% as is the market consensus would hardly constitute a worry.

Offshore tonight, ECB President Mario Draghi is due to speak to the Dutch parliament  though this is unlikely to be the place – or the time – to discuss shifting language on economic risks and ECB policy prospects.

Overnight

On global stock markets, the S&P 500 was -0.15%. Bond markets saw US 10-years +1.27bp to 2.40%. In commodities, Brent crude oil -0.47% to $48.87, gold-0.6% to $1,220,  iron ore -1.6% to $60.75, steam coal -0.5% to $73.85, met.coal +1.4% to $177.00. AUD is at 0.7341 and the range since yesterday 5pm Sydney time is 0.7329 to 0.7399.

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