Markets Today: (More) Good vibrations

More unwinding of the Trump lower taxes/higher infrastructure spending US$ reflation trade has again been the order of the day. The Bloomberg spot USD dollar index is down by ¾% as markets again sell the big buck, reacting to the latest statements from the new Administration, selling kicking off earlier in the session with some safe-haven buying of JPY and CHF in response to the immigration policies.

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If the machinations over the firing of the US Attorney-General wasn’t enough on top of the immigration bans, Trump trade advisor Peter Navarro (put that name into your memory banks now) said the Euro was “grossly undervalued”, criticising Germany for using an undervalued EUR to exploit the US and Germany’s own EU partners.  Not to be left out, the President took a swipe at China and Japan saying they “plan” their money markets, presumably a pejorative reference to QE and lower currencies.

Sensitivity over the dollar’s strength is becoming an issue, and of course, could yet come into Fed calculations, given time. The President has also been meeting with health/pharma companies telling them that plans to gut regulations, to smooth the FDA approval process and cut taxes would overwhelm lower drug prices.  Health care stocks are, with (defensive) Utilities, outperforming the US market overnight, rising in a down day for stocks.

Dollar selling and Euro buying was done no harm from respectable EZ releases.  The Eurozone’s trifecta of flash Q4 GDP, January CPI and its December unemployment reflected continued economic improvement.  GDP was 0.5/1.8, a tenth more than expected, unemployment was down to 9.6%.  Core CPI was steady at 0.9%, while headline inflation was higher at 1.8%, up from 1.1%, thanks to an energy kick (possibly transitory unless oil keeps getting support and the EUR declines again) and some from food. Domestic services inflation was muted at 1.2%.  So no clean fuel for the ECB to shift from their current QE policy path.

On the other side of the Atlantic – ahead of tomorrow’s FOMC announcement – the data set turned was mixed and not standing in the way of US$ selling then underway.  US House prices in November continued rising, up 0.88%/5.27%% (close to October’s), while the Conference Board’s Consumer Confidence report for January missed expectations at 111.8 down from 113.3 with 112.8 the consensus median.  If the truth be told, it’s still a sizeable net gain in confidence recent months and at levels not seen since before the GFC.  And the Jobs Plentiful index component of the report continued to improve, as consumers’ perceptions of job opportunities rose again to 5.9.  As a slight dampener, and running against the tide of what have been more improving regional manufacturing indexes in January, the Chicago PMI pulled back to 50.3 from 54.6 (E: 55.0).

The AUD has tested but stalled at 0.76, trading at 0.7582, making one of the more modest net gains against the US$, even with yesterday’s positive NAB Survey and RBA Credit tailwinds.  With the USD softer, traded commodity prices have generally been higher overnight, copper +2.94%, gold +$18.80 (+1.56%) to $1215 but Brent up a more modest 0.85% to $55.70.  Treasuries have been bid.

Coming Up

In today’s APAC session, will China’s official PMIs differ materially from expectations and if so in which direction?  Australia’s AiG PMI Manufacturing index for January (L: 55.4), the CoreLogic resi price report for January (around 0.7-0.8%) and the RBA Commodity Price Index for January this afternoon will likely have little to no market impact.

For the Kiwi, it’ll be the Q4 labour market and wage costs data that will be worth a look.  Recall that last quarter there was a very strong – almost unbelievably so – employment +1.6/6.1%; some payback has got to be a chance.  Our BNZ colleagues look for a modest 0.6% q/q gain with focus ideally on the unemployment rate, forecast down to 4.8% from 4.9%.  PM English is expected to announce a September 23 election at his 2pm NZT press conference.

First up tonight in the US is the ISM Manufacturing report, a slight increase the consensus pick, released while the FOMC deliberates. For the FOMC tomorrow morning, we suspect it will be what changes in the statement are revealed.  Right now, the market is pricing barely a 20% chance of a lift in rates, Janet Yellen’s recent speeches non-committal on timing as you’d expect.  Her recent speech in San Francisco spoke of the economy nearing the Fed’s employment and inflation goals, of gradual rises, that the Fed can’t give the timing of the next hike while not delaying too much that would risk a “nasty surprise”, all keeping here options open.  Only one of the 92 analysts surveyed by Bloomberg is forecasting a hike at tonight’s meeting.  The market will be most interested in whether the statement will be anything more specific on timing and whether the 15 March meeting is “seriously live” or not.  The market is currently pricing in 9bps of tightening for that meeting, a 37% chance of a hike.  Monday night’s PCE deflators raised no new inflation risk alarm bells, but neither did it suggest that inflation is receding.

Overnight

On global stock markets, the S&P 500 was -0.27%. Bond markets saw US 10-years -4.42bp to 2.44%. In commodities, Brent crude oil +0.47% to $55.58, gold+1.6% to $1,212, iron ore did not trade, steam coal -0.7% to $83.00, met.coal +0.2% to $185.53. AUD is at 0.7582 and the range since yesterday 5pm Sydney time is 0.7542 to 0.7606.

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