The AUD had a big knee-jerk bounce after the stronger-then-expected GDP but the rally ran out of steam as the pair approached 0.73 then was stunted further after the AFR’s RBA-watcher Alan Mitchell’s wrote an on line piece suggesting that despite the strong growth, a rate cut would still likely be warranted.  And that trading yesterday set the tone for the AUD overnight, and despite what’s been a pretty languid USD that’s been edging a little lower in the overnight session.  Commodity prices did not do a whole lot: oil has been a touch stronger into the OPEC meeting tonight, while base metals were mixed, copper down but nickel up.  Spot iron ore has been the standout, giving back $1.75/t to $48.40, down 3.49%.

The final May Eurozone Manufacturing PMIs were left unrevised at 51.5, while the US Manufacturing ISM headline popped a little higher to 51.3 from 50.8 (50.3 was forecast).  That’s one more hurdle crossed toward the Fed’s June/July meetings, though any mild enthusiasm from that report was dented by a weaker-than-expected construction spending report for April and the Atlanta Fed shaving its GDPNow estimate for US Q2 GDP back to 2.5% from 2.9%, including from some of the detail of the ISM report.  The market continued to price in a still well below 50% probability of a hike at the June 15 FOMC (now 22%) and an over than 50% chance of a hike in July (now 53%).  US 2-year Treasury yields have closed 2 bps higher at 0.899%; 10s were virtually unchanged with US equities closing marginally higher.

The Fed’s Beige Book was also released earlier this morning and did not reveal too much more that would sway the growth and inflation readings on the US.  If anything it was a touch softer.  The 12 Districts variously outlined a mixed growth performance across the US of mostly “modest” or “moderate” growth (if someone can explain that nuance I’d be happy to listen), though a few Districts reported flat or slowing activity.  Tight labour markets were widely reported with modest wages growth and price pressures growing slightly.

The overnight global dairy auction rose 3.4%, supporting the NZD that outperformed the AUD yesterday despite a better AU GDP print.  Sterling has been on the defensive, tinged with Brexit uncertainty while the JPY strengthened after PM Abe officially postponed the sales tax rise until 2019.

Coming up

After GDP, the market now looks to today’s retail sales and international trade reports, NAB looking for lower growth in retail sales (0.2% after 0.4% in March) and the trade deficit to push up toward $2,700mn from $2,100mn in March.  Our suspicion is that a further bout of discounting may have taken the edge off nominal sales growth, as would some further softness out of WA.  As for the trade figures, gold exports are extremely volatile from month to month and were strong last month and due for payback.  We also look for softer coal exports and a monthly dip in iron ore shipment volumes.  In summary, it’s mostly monthly noise rather than any new trend.  LNG shipment volumes will be trending higher, much higher, this year and next.

Tonight is the June ECB meeting, OPEC is also meeting, presumably to review and give their tick of approval so far to their market share defence strategy even though there were wire reports overnight of an output ceiling.  The ECB will be reviewing the OK growth performance and policy progress with its enhanced monetary accommodation announced and now being rolled out.  As far as data is concerned there’s the pre-payrolls ADP employment report that the market usually takes with the grain of salt.  Much more focus on the weekly US jobless claims.  Dallas Fed President Kaplan (non-voter) is speaking in Boston on the economy while Fed Governor Powell is speaking on prudential regulation though there’s always the potential there for more economy/ rates grabs for the newswires.

Overnight

On global stock markets, the S&P 500 was +0.11%. Bond markets saw US 10-years -0.34bp to 1.84%. In commodities, Brent crude oil +0.00% to $49.89, gold-0.2% to $1,215, iron ore -3.5% to $48.40. AUD is at 0.7257 and the range since yesterday 5pm Sydney time is 0.7229 to 0.7273.

Good luck.

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•  Markets Today: 2 June 2016 (PDF, 1MB)

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