Markets Today: Marking time ahead of ECB and Payrolls

Markets continue to tread water ahead of the more important risk events later this week – the ECB meeting Thursday and US Payrolls Friday. There was little in the way of significant movement in bonds or currencies, while equities were a touch lower after having had hit fresh highs last week.

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Economic data was mute with the most significant piece being the US Jan Trade Deficit which increased to $48.5bn – although at a near five year high it was as expected. If repeated in Feb and Mar, net exports would likely detract from US growth and the Atlanta Fed has downgraded its Q1 GDPNow forecast to 1.3% from 1.8%.  The outcome is also likely to give further currency to protectionist policies, where Trump’s Trade Adviser Peter Navarro indicated the US would make a reduction in the trade deficit its top policy focus noting that the U.S. faced a growing economic and potential national security risk from major trading partners. In other political news, House Republicans have proposed an Obamacare replacement plan while Trump also signed an updated travel ban with little reaction.

In the FX space, the US dollar (DXY) was up just 0.1% across the board. Other major currency pairs fell by a similar amount with the Euro and Yen both down 0.1%. The underperformers were the Pound (-0.3%) and the Kiwi (‑0.5%).

The Aussie rose 0.1% helped along by the RBA’s post meeting statement. Although the statement was mostly unchanged, it did act to reemphasise the optimism coming from Martin Place and the Governor’s view (expressed in his recent Parliamentary Testimony) that “a period of stability of interest rates…is quite a reasonable one”. The RBA is currently balancing getting back to the inflation objective and lowering the unemployment more quickly against avoiding creating fragilities in household balance sheets. Two changes are worth highlighting: (1) the RBA upgraded its view on the boost from commodity prices on Australian incomes to “significant”; and (2) the RBA raised its concerns around the housing market making a less definitive statement on the success of supervisory lending standards than in the past. Overall that suggests a high bar to further easing.

The British Pound was the clear underperformer. Overnight Prime Minister May suffered a defeat on her Brexit bill with the House of Lords voting to change the draft bill in order to give Parliament veto rights over the final Brexit agreement, as well as the power to stop the UK walking away from talks without a deal. The bill will need to be debated again in the House of Commons and it is unclear whether this will impact on the date PM May has given to trigger Article 50 – indicated to be sometime from March 15 to the 31st. Unofficial retail data in the UK was also weak with the Retail Consortium’s survey stating retail trade fell 0.4% m/m in Feb – official figures out on March 23.

Movements in sovereign bond yields were also mute. US Treasury yields rose 0.7 bps to 2.51% with the range being 2.49-2.51% overnight. German Bund yields declined 2.3 bps to 0.32% with a weak January Factory Goods Orders contributing (-7.4% m/m against an expected -2.5% outcome) along with reports that Swiss FX reserves increased by 24.2bn. Movements in Aussie CGS mostly followed US Treasuries the previous day, up 1.8 bps to 2.82%.

Equity markets also registered small moves. The S&P500 was down 0.2% while EuroStoxx was unchanged. A Trump tweet of “there will be competition in the drug industry. Pricing…will come way down!” weighed on Pharmaceuticals with the sub-index down 0.6%.

Finally, Chinese FX Reserves rose $6.9bn in February to be $3.0 trillion – the first increase since June 2016 – and beating expectations of a $29.2bn fall. SAFE said that capital outflow pressures would continue to ease and suggests tightening capital controls are working to alleviate outflow pressures.

Coming Up

A quiet day down under with no data releases scheduled. Most focus in the Asian time zone will be on the Chinese Trade Balance – no time specified but is usually out post 12pm AEDT. The market looks for a surplus of $27bn.  Japan also has its Balance of Payments for January along with the Eco Watchers survey.

In Europe, focus will be on the UK Chancellor’s budget though this usually is not market moving with most major items usually flagged beforehand. Germany also has Industrial Production figures for January which will likely garner greater attention following the surprise fall in December and the sharp fall in factory goods orders overnight – the market consensus looks for a bounce of 2.7% m/m.

Otherwise most focus will be on the US where ADP Employment could provide a reasonable guide to the more important Non-farm Payrolls print Friday (see chart). Although ADP has been discounted by many as an indicator, it has improved over the past year. The market currently looks for a 189k print.

Overnight

On global stock markets, the S&P 500 was -0.16%. Bond markets saw US 10-years +0.55bp to 2.51%. In commodities, Brent crude oil -0.20% to $55.9, gold-0.9% to $1,214, iron ore +0.1% to $89.80, steam coal -1.2% to $79.25, met.coal +0.0% to $163.25. AUD is at 0.759 and the range since yesterday 5pm Sydney time is 0.7577 to 0.7633.

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