Markets Today: Iron ore sees some support return

AUD/NZD parity party celebrations will just have to be put back into the cupboard for now, courtesy of yesterday’s higher than expected AU CPI, headline and underlying inflation higher by up to a tenth.

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AUD/NZD parity party celebrations will just have to be put back into the cupboard for now, courtesy of yesterday’s higher than expected AU CPI, headline and underlying inflation higher by up to a tenth.

To our eyes, the data continues to provide scope for a further interest rate cut, but do not of themselves pressure the RBA to cut rates further. The Bank is likely to continue to forecast inflation as consistent with its 2-3% inflation target, especially given low wage growth. However, the broad suite of core and analytical CPI series suggests inflation running closer to the middle of the RBA’s target range than at the lower end, which the Bank would likely read as a sign that the economy is not weakening substantially at the present time.

The data gave a boost to the AUD which followed through for a while into the London session, regaining a USD 78 cents handle for only the third time this month, but unable to hold that level. It has now traded above its 50dma (0.7727) for 5 consecutive days and against a background of substantial short positions, we’d suggest there is more scope for the squeeze to continue, especially if Monday’s 0.7843 high can be taken out.  The AUD/USD traded to a high overnight of just above 0.78 but could not sustain a further move higher, consolidating this morning just above the mid 0.77s.

In connection with the AUD, there was some moderately encouraging resource commodity news out of Chinese late yesterday with iron ore spot prices finding some support for once, the Qingdao 62% fines price up $3/t to $54.04/t, a rise of 5.88%.  Dalian iron ore futures rose 3.69% as did Chinese steel rebar futures, by 0.82%.  Mind you, it’s had largish rise during this down cycle only to later retreat.

Elsewhere, markets were relatively orderly.  The pound climbed in the aftermath of the release of the Minutes from the BoE April meeting. While the vote to hold rates steady was unanimous, the Minutes revealed that keeping interest rates at a record low was a “finely balanced” decision for a minority of officials. UK Gilt yields rose as did sterling, also giving a bid tone to yields into the open of the US market, US treasury yields also getting some support from better than expected US Existing Home Sales and House prices reports.

Coming up today/ tonight

Some Kiwi dollar focus first up this morning.  RBNZ Assistant Governor John McDermott is speaking today (10.00 AEST) ahead of next week’s OCR Review. My BNZ colleague Craig Ebert has written this morning: We don’t expect RBNZ Assistant Governor John McDermott to be hawkish in his inflation speech today. But he’ll likely be balanced enough to appear a little hawkish, in the eyes of the rate-cut inclined markets.  There is also every chance he will talk about the too-high exchange rate.

Locally, we have the March quarter NAB Business Survey. It’s based on a larger sample and polls business also on the 12 month outlook for capital expenditure as well as the factors that business see as constraints on output and profitability.  It was surveyed at the same time as the February monthly survey. Also in the Asia time zone today is the release of Japan’s Manufacturing PMI for April as well as April’s flash HSBC Manufacturing PMI for China at 11.45 that’s expected to be steady at 49.6.  It’s much more volatile than the official PMI but nevertheless it will impact on sentiment toward China’s growth momentum, or lack thereof.

Tonight sees the release of the preliminary Euro Manufacturing and Service PMIs, the Eurozone Manufacturing PMI expected to be up to 52.5 from 52.2.  (The US Manufacturing ISM does not come until next week though the Markit measure of US’s Manufacturing PMI is out tonight.)  In the US, it’s the release of weekly jobless claims, news home sales as well as the Kansas City Fed regional manufacturing report.

Overnight

AUD tested above 0.78 for a time: Eurostoxx 600 -0.0%, Dax -0.6%, CAC +0.4%, FTSE -0.5%.  Dow +89 points to 18,038, +0.5%, S&P 500 +0.5%, Nasdaq +0.5%, VIX 12.71 -4.1%.  Mumbai +2.4%, Nikkei 225 +0.4% and ASX 200 +0.8%; ASX SPI futures this morning +0.2%.  US bond yields: 2s at 0.54% (3), 10s at 1.98% (+7).  WTI oil at $56.19 (-0.7%), Brent at $62.69 (+1.0%), Malaysian Tapis (yesterday) $62.04 (-1.5%).  Gold at $1186.20/oz (-1.4%). Base metals: LME copper -0.6%, nickel +0.0%, aluminium -0.6%. Iron ore $54.0/t +5.9% Chinese steel rebar futures +0.8%. Soft commodities spot futures: wheat -0.2%, sugar +1.7%, cotton -0.1%, coffee 0.7%.  Euro Dec 14 CO2 emissions at €7.12/t (0.0%). The AUD/USD’s range overnight 0.7747-0.7807; indicative range today 0.7715-0.7790; the AUD/USD is 0.7755 now

US FHFA House prices (Feb) 0.7% (L: 0.3%; E: 0.6%); Existing Home Sales (Mar) 5.19M/+6.1% (L: 4.88M/+1.2%; E: 5.01M/+2.7%); EC Consumer Confidence (Apr) -4.6

(L: -3.7; E: -2)

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