Markets Today: A little less conversation

Titles for our Markets Today note are a great topic of conversation with colleagues and clients alike.

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Last night at a work function I was given a few suggestions, some were odd, others were funny and there was also a few career limiting ones. In the end, for today I had to go with my colleague Sue Walker’s suggestion. “A little less conversation” was Elvis’ post mortem number one hit, and it helped him overtake the Beatles as the artist with most hits in the UK (18 vs17).

Last night Governor Lowe spoke at the RBA Board Dinner and similar to yesterday’s Statement his remarks were focused on the labour and housing markets. The Governor noted that the labour market’s conditions remain pretty soft and added that “we will want to see an improvement here before we can be confident that growth in the overall economy is strengthening”. As for the housing market he reiterated the Bank’s support for the need of additional strengthening in lending standards, but then he also said that other arms of policy need to do more in order to address housing supply issues (infrastructure, land release – and not mentioned, even immigration and/or foreign investment, none of which are RBA policy levers).

US equities have managed to end the day with modest gains while main European equity indices posted gains between 0.20% and 0.55%. After yesterday’s rally, US Treasury yields are a little bit higher across the curve with the 10y note currently trading at 2.363%, 3.5bps higher relative to Sydney’s closing levels.

The USD has been supported by the move higher in UST yields and is stronger against all G10 currencies barring JPY.  That said with US equities closing in positive territory and 10Y UST edging higher later in the session we wouldn’t be surprise to see USD/JPY make some gains today.

Meanwhile the AUD and NZD are at the bottom of the pile, down 0.57% and 0.58% respectively. The move lower in the AUD was sparked by the RBA policy announcement yesterday afternoon. As expected the RBA left the cash rate unchanged, but the acknowledgement of a weaker labour market, together with clear stress on macro-prudential restraints were seen as an excuse to sell the AUD, even though earlier in the day the AUD had been boosted by better than expected trade data ($3.6bn surplus vs $1.6bn exp.). The technical break below 0.7580 was also factor weighing on the AUD, later on Governor’s remarks did little to arrest the slide with pair trading to a low of 0.7548 about two hours after he spoke. This morning the AUD has regained a little bit of ground and it has settled just above 0.7560.

The NZD underperformance has been a bit more puzzling, yesterday the QSBO survey was strong and overnight the GDT dairy auction was better than expected. The price index climbed 1.6% against expectations of a small decline. NZD is currently not trading on fundamentals and is probably suffering a bit of AUD weakness contagion.

As for commodities, oil prices have edged closed to 2% seemingly boosted by a Bloomberg survey suggesting US crude supplies probably fell by 150k barrels last week, (the EIA report is out tonight). Iron ore, copper and gold are little change while met. coal is the outstanding performer, up 10.3% amid supply disruption in Australia following cyclone Debbie.

Data releases were largely ignored last night. The March UK construction PMI was a little bit weaker (52.2 vs. 52.5 exp.) and EZ retail sales for February a touch stronger (0.7% vs. 0.5% exp.). The US trade gap for February narrowed a little further than consensus to $43.6bn vs 48.5bn in January.

Coming Up

Services PMIs is the theme for the day. In Australia we get the AiG Performance Services index, then the Nikkei Services PMI is out in Japan and later today the UK, Eurozone (final) and Germany (final) also publish their readings for March. The US releases its non-manufacturing ISM and ahead of payrolls on Friday, the ADP report is also out tonight. RBA Heath speaks at a Bloomberg event in Sydney and early tomorrow morning the Fed publishes the Minutes from its March meeting.

Of all these surveys out today the UK and US are probably the most important ones. Services is the biggest sector in the UK economy and although the market is looking for an unchanged print of 53.3, the cooling in the latest manufacturing and construction PMIs suggest there is downside risk to today’s release.

As for the non-manufacturing ISM, although still at elevated levels, the market is looking for a small pull back.  In February the headline number printed at 57.6 and expectations are for a 57.0 outcome in March. The employment index is also going to be important and in February it printed at 55.2.

The correlation between the ADP report and non-farm paryolls has improved in recent years and for this week the market is looking for both the ADP and non-farm payrolls to print below the strong numbers delivered in February. 190k are expected for ADP (250k prev.) and 175k for payrolls (235k). A big ADP miss will undoubtedly affect market expectations for non-farm payrolls on Friday.

In spite of the overabundance of Fed speakers since the March 14-15 FOMC meeting, the Minutes are still likely to gather a fair bit of market’s attention. The market will be on the lookout for any clues on the Fed’s Balance sheet unwind strategy as well as any signs that might reflect a bias for a faster approach to lifting the funds rate.

Overnight

On global stock markets, the S&P 500 was +0.06%. Bond markets saw US 10-years +4.12bp to 2.36%. In commodities, Brent crude oil +2.03% to $54.2, gold+0.3% to $1,254, iron ore +0.1% to $79.45, steam coal +0.3% to $89.75, met.coal +10.3% to $215.00. AUD is at 0.7564 and the range since yesterday 5pm Sydney time is 0.7545 to 0.7615.

Good luck.

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