Markets Today: Don’t let me be misunderstood

The supposedly “lively” conversation that President Trump and PM Turnbull had yesterday over the Australia-US refugee deal has gotten quite a deal of not just Australian press but international press coverage overnight.

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It has come on the back of the President’s tweet and distaste for the deal reached with the Obama Administration.  What with US criticism of Japan and Japan and Iran being put ON NOTICE (his capitals, not mine) and even a wild story yesterday that the US was considering sending troops south of the border to Mexico!  International relations and trade has been totally front of mind.

Will the noise quieten down?  We can only wait and see.  Speaking to a National Prayer Breakfast in Washington overnight, President Trump said: “When you hear of tough phone calls I have, don’t worry about it.  The world is in trouble but we’re going to straighten it out, OK?  That’s what I do.”

With the news out of Washington and the new Administration ramping up even further, past Trump reflation enthusiasm has waned further.  The USD has continued to leak lower, stocks are modestly lower in the afternoon session with Treasuries little changed.

At the top of the FX leader board over the past 24 hours is the Aussie in the wake of yesterday’s record trade surplus, thanks to growing export volumes and the super-charged resource commodity prices through the second half of last year.  The AUD had been struggling to break through 0.76 in recent times, but it was bid up into the release of the trade number at 11.30 yesterday, that buying accelerating after the report was released, trading toward 0.77 overnight, before settling back in the mid 0.76s, currently at around 0.7660.  We noted in our post-trade report yesterday that not only does the better trade add to Australia’s growth in the December quarter but it will be something that the ratings agencies will have also noticed, given the focus on Australia’s sovereign rating and some concern – now presumably less – over Australia’s current account deficit.

While there has been understandable and relentless big dollar focus this week, there was real interest in Sterling overnight, a day after the Parliamentary approval to trigger Article 50 has been delivered in essence.  The UK Government published its White Paper on Brexit while there was close interest in the BoE overnight, its growth and inflation forecasts and Governor Carney’s presser.

The BoE left policy unchanged as entirely expected. It raised its growth forecasts for this year from 1.4% to 2.0%, but trimmed their medium term inflation forecasts.  The tone of the forecasts changes though and Carney’s press conference evinced less hawkishness or inflation fetish than the market was prepared for, the Bank having to weigh up its formal outlook for higher than target inflation against the post-Brexit economic uncertainties and the two way risks.

The Pound initially bounced on news of no change in policy and an increase in near term growth, but then pulled back from some dialling back of the degree of BoE hawkishness the market was half expecting.  Sterling briefly spiked from 1.2650 to 1.27, but then fell back all the way through 1.26 to the lower 1.25s where it sits this morning.  AUD/GBP this time yesterday was below 0.60; it’s now above 0.61.

It was a light night for data, the market thinking ahead to tonight’s and what payrolls and the US Non-manufacturing ISM might do to change Fed pricing.  US Jobless claims remained low at 246k.

Coming Up

It’s likely to be uneventful in today’s APAC session, if the local calendar guide is any indication.  There’s only the AiG Services Index and BoJ 19-20 Minutes, the latter of course coming after this week’s BoJ meeting and Kuroda press conference.  NZ has its ANZ Commodity Price Index for January.  Of more interest will be the Caixin China Manufacturing PMI that’s expected to be little changed at 51.8 after last month’s 51.9 reading.

Ahead of payrolls, in Europe there is the final release of the EZ Services/Composite PMIs for January, the final vintage usually revised little from the flash release.

Payrolls: markets are expecting another solid result and, as usual, interest not just in the initial payrolls headline but the underbelly of the report, in unemployment and the broader U6 unemployment rate as well as the key average hourly earnings that’s been on a rising trend through last year, annual growth increasing from 2.6% top December 2015 to 2.9% in December 2016.  That’s the one to watch.

Chicago Fed President Evans (a voter this year) is speaking tonight and no doubt will get a lot of interest, 24 hours on from the FOMC.  There is also the ISM Non-Manufacturing report for January that’s expected to be at a still high 57 (L:57.2).  The December Factory orders report is also due.

Looking ahead to next week, there is the RBA Board meeting on Tuesday, Governor Lowe is speaking on Thursday evening while the Bank publishes its quarterly Statement on Monetary Policy on Friday.

Overnight

On global stock markets, the S&P 500 is -0.14%. Bond markets saw US 10-years +0.01bp to 2.47%. In commodities, Brent crude oil -0.39% to $56.58, gold+0.8% to $1,215, iron ore still closed for new year, steam coal +0.1% to $82.75, met.coal +0.0% to $168.00. AUD is at 0.7661 and the range since yesterday 5pm Sydney time is 0.7635 to 0.7696.

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