Markets Today: Under pressure

European and US equities have brushed aside the negative lead from Asia which saw the Shanghai composite down nearly 1% on the day and its fourth session of declines.

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The Euro has also come under pressure amid softer than expected German inflation with the move lower in the currency also affected by the widening in the 10y US-Bunds spread. Solid US economic data helped 10y UST yields climb back above 2.40% while 10y Bunds edged a little bit lower as investors rethink the prospects of the ECB retaining its loose monetary policy for a while longer.

Energy shares on either side of the Atlantic have benefited by yet another jump in oil prices while US financial, yesterday’s losers, are leading the move higher in the US, up 1.40% as we type. WTI oil is up 1.5% over the past 24 hours and now trades at $50.27. The black gold was boosted over night following comments from Kuwait’s oil minister suggesting Kuwait and other countries support prolonging production cuts that are scheduled to expire in June.

DXY, the USD index, is back above the 100 mark (up 0.50% over the past 24hrs) supported by an upward revision to the US Q4 GDP reading, up to 2.1% from 1.9% with real consumer spending climbing to 3.5% from 3.0%. The strength in the USD has largely come from its outperformance against the EUR and JPY while buoyant risk appetite and a solid to steady night for commodities have kept the AUD, NZD and CAD essentially unchanged from Sydney’s closing levels.

After trading to an intraday high of 1.0906 on Monday, EUR has fallen another 0.70% overnight and is currently trading 1.0681. Softer than expected CPI readings from Germany and Spain have weighted on the currency union as investors reassess the timing on the ECB exit strategy, Germany’s annual CPI inflation fell to 1.5% in February from 2.2%, while in Spain inflation dropped form 3.0% to 2.1%.  Comments from ECB Liikanen didn’t help the currency either as he noted that the euro area still needs “a very substantial degree of monetary accommodation for underlying inflation pressures to build up and support inflation in the medium term.”

The rise in UST yields has helped USD/JPY climb another 0.5% overnight. The pair is currently trading at ¥111.78 and if Asia takes the risk positive lead from the US, a move above ¥112 today cannot be ruled out. USD month end buying is potentially another consideration.

Lastly, Donald Trump has made few headlines warning House Conservatives Republicans that he would work against them if they don’t get on with the team and CNBC reported that the Trump administration was assessing the scope of its power to penalise countries whose currencies it says are undervalued.

Coming Up

As we are about to press the send button, Fed Dudley is speaking on financial conditions and monetary policy. New Zealand building permits are today’s first cab off the rank and our BNZ colleagues note that unless we get a reversal in the monthly reading (Feb), another soft number will cast doubts on construction’s contribution to GDP growth over the early part of 2017.Then New Zealand gets the ANZ business outlook survey, which is expected to show decent levels of confidence and another tick up in inflation expectations.

Also this morning in Australia we get the RBA Credit report for February. Our economists will be looking out for any comments on the growth in housing credit, especially investor housing, given that recent investor housing approvals in NSW and Victoria have shown signs of re-acceleration.

At, midday Sydney time, China releases its official PMIs for March and the market is looking for a small uptick in the manufacturing survey to 51.7 from 51.6. If so, the move would be consistent with the small rise seen in the satellite manufacturing survey. Then it is all about inflation with Japan (Feb) and the Euro zone (March estimate) CPI readings followed by the all-important US PCE deflator.

Slowly but surely price pressures are rising in Japan with the core reading expected to rise to 0.2% from 0.1%. Japan also prints its jobless rate (expected to remain unchanged at 3%) and industrial production which is seen rising to 1.2% from 0.4%.

The euro area inflation reading for March is expected to decline to 1.8% from 2.0% previously. The core CPI reading will also be important as the ECB looks into this number as a guide on the sustainability of price pressures. Core CPI is expected to decline from 0.9% to 0.8%.

As for the US data, real spending was likely unchanged due to the unusually warm weather amid less demand for utilities. Meanwhile the monthly Core PCE reading is seen at 0.2% down from 0.3% in February but the yoy reading is seen unchanged at 1.7%. Meaning that at least from this reading, there is no need for an imminent Fed funds rate hike. The Chicago PMI and final Univ. Michigan consumer sentiment are also due out tonight and Fed Kashkari, Bullard, Dudley, Harker, Lacker and Tarullo are all speaking tonight.

Overnight

On global stock markets, the S&P 500 was +0.32%. Bond markets saw US 10-years +4.14bp to 2.42%. In commodities, Brent crude oil +0.80% to $52.84, gold-0.9% to $1,243, iron ore -0.6% to $81.78, steam coal -0.1% to $80.70, met.coal +0.0% to $156.00. AUD is at 0.7655 and the range since yesterday 5pm Sydney time is 0.7649 to 0.7679.

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