Markets Today: You gotta lift and sometimes that’s how it is

Lift was Shannon Noll’s first post Australian Idol hit. The lyrics “seems like forever that you’ve been falling, it’s time to move on” are an apt description of the mood of central banks, which have been removing expectations of further policy easing and getting the market into thinking of central banks tightening policy. This theme continued overnight with comments from the Bank of Canada’s Poloz and Bank of England’s Carney.

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Lift was Shannon Noll’s first post Australian Idol hit. The lyrics “seems like forever that you’ve been falling, it’s time to move on” are an apt description of the mood of central banks, which have been removing expectations of further policy easing and getting the market into thinking of central banks tightening policy. This theme continued overnight with comments from the Bank of Canada’s Poloz and Bank of England’s Carney.

In terms of market moves, most action happened in currencies: Canadian Dollar (+1.3%); British Pound (+0.9%); Euro (+0.4%) and the Aussie (+0.8%) – mostly on the back of central bank commentary and a move higher in commodity prices. There was some intra-day volatility in bond yields, while equities were mixed with Europe flat (EuroStoxx -0.1%) and the US higher (S&P500 +0.9%).

The Canadian dollar surged 1.3% on the back of continued hawkish comments from the Bank of Canada and higher oil prices. Governor Poloz reinforced the view of a possible rate hike in the near future: “[rate cuts] have done their job. We’re just approaching a new interest rate decision… certainly we need to be at least considering that whole situation now that capacity –excess capacity – is being used up steadily”. Markets have correspondingly shifted to pricing a 70% chance of a rate hike in July, up from just 35% a couple of days ago.

The Pound also got into the action up 0.9% overnight. Comments from Bank of England Governor Carney were interpreted as being more hawkish than his previous comments on the economy, noting: “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional”. Markets are now pricing a 55% chance of a rate hike by November 2017 compared to 44% a couple of days ago.

Rates markets have experienced some volatility. While German Bund yields finished unchanged at 0.37%, they did trade in a wide range of 0.33-0.41 after yesterday’s 13bps increase. Yields did open higher in Europe, but they were taken lower on comments by unnamed ECB sources who said the market had misinterpreted Draghi yesterday (“[it] was intended to strike a balance between recognising the currency bloc’s economic strength and warning that monetary support is still needed”). This move was subsequently reversed on Carney’s comments and Draghi did not seek to clarify his earlier speech. Moves in US Treasuries were similar, up 1bps to 2.22%.

Why have central banks become hawkish all of a sudden? Draghi speech yesterday is worth re-reading on this, but it seems: (1) the link between monetary policy and the real economy is working; (2) the link between a growing real economy and inflation is more subdued than in the past, but the factors holding this back are temporary and thus brings the fear of inflation breaking out as the economy continues to improve; and (3) financial conditions are becoming easier as the real economy expands (see chart below). Thus a constant policy stance is becoming more accommodative.

Will Australia join the central bank party? A Bloomberg article covering a three day old article by ex RBA board member John Edwards suggested it may. Dr Edwards opined “if the RBA’s economic forecasts prove correct. It’s possible the tightening could start earlier, or if not the tightening itself, at least the signalling which should precede it. We may be seeing a little of that now…it would [see a]…natural policy rate as at least 3.5%.”
Moves in commodities were supportive for the Aussie: WTI up 1.2% to $47.37 a barrel its fifth consecutive daily increase. Iron Ore was also stronger, up 4.4% to $62.3 a tonne and well up on the recent lows of $53 a tonne.

Coming Up
International focus will be on the first cut of the German CPI for June (10.00pm AEST). The market consensus looks for 1.4% y/y, down slightly from the 1.5% y/y pace in May. Also out in the Euro area is German Gfk Consumer Confidence (4.00pm AEST). Other international touch points are unlikely to move the markets. In NZ the ANZ Activity Outlook (11.00am AEST), Japan has Retail Sales (3.00pm AEST), and China has Current Account Balance.
The US has the third estimate of Q1 GDP – markets still thinking of unrevised growth of 1.2% annualised, along the usual Weekly Jobless Claims. Fed speak continues with Bullard (non-voter, dove) talking in London about the US economy and monetary policy.

Overnight
On global stock markets, the S&P 500 was +0.92%. Bond markets saw US 10-years +1.22bp to 2.22%. In commodities, Brent crude oil +1.54% to $47.37, gold+0.1% to $1,248, iron ore +4.4% to $62.33, steam coal +0.1% to $80.65, met. coal +0.0% to $146.50. AUD is at 0.7641 and the range since yesterday 5pm Sydney time is 0.7577 to 0.7645.

For full analysis, download report:

Markets Today: 29 June 2107 (PDF, 1MB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets