Markets Today: Quiet Houses

Some very refined harmonies from Seattle indie folk band Fleet Foxes to start the week.

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Friday’s markets were not just about more weak data – important as that was with US Housing Starts, Housing Permits and Consumer Sentiment all much weaker than expected and driving the US dollar and US bond yields lower.  Amazon’s $13.7bn bid for Whole Foods sent shivers down the spine of the US consumer staples sector, off 2% at one point with $39bn was knocked off the market cap of the sector, led by Wal Mart. Amazon is promising to bring more automation and lower food prices to a company dubbed ‘Whole Paycheck’. More structural disinflation may lie ahead.

Despite the hit to consumer staples, the broader stocks markets managed to (just) close in the black – the NASDAQ again the exception, down 0.22% to be 0.9% lower on the week and more than 3% off its earlier June highs. The S&P500 closed just 0.03% higher and 0.1% up on the week and the Dow +0.11% to be 0.1% w/w. The VIX lost 0.52 to 10.38 and is 0.32 down on the week.

In FX, the dollar was weaker across the board, the narrow DXY index -0.28% but only 0.11% lower on the week while BBDXY lost 0.33% to be 0.3% lower on the week.  In individual currencies NZD gained the most, +0.64% to 0.7254 followed by NOK (-0.59%) and AUD, the latter +0.55% to 0.7621. This makes it the week’s second top performer after the CAD, the latter keying off the shift in Bank of Canada narrative earlier in the week.

In rates markets, 2-year Treasuries finished 3.6bps lower at 1.317% and 2bps down on the week. 10s were -1.3bps to 2.152% (4.9bps w/w) so pretty much bisecting the pre and post US CPI highs and lows near 2.20% and 2.10% respectively.

Commodities were stronger across the board. Gold added $1.8 to $1254, oil added 30-40 cents, WTI to $44.74 (-$1.09 on the week) and Brent to $47.37 (-$0.78 on the week). Friday’s Baker Hughes U.S. oil rig count rose by another 6 rigs to 747, now the 22nd straight weekly rise. Iron ore added 50 cents to $55.75 for a weekly rise of $1.34.

As well as the weak data, led by the 5.1% drop in housing starts and 2.6 point fall in the University of Michigan’s preliminary consumer sentiment reading, Fed speak was also interesting.  Dallas Fed President Robert Kaplan said the Fed needed to see more progress towards achieving its 2% inflation target before taking a next step. He acknowledged that the Phillips curve looks to be flatter than has been the case historically though said recent weakness may reflect some transitory factors. Neel Kashkari – who dissented against higher rates last week, said it was not yet possible to know if the drop in inflation was transitory. He argues “the outcome that the current FOMC is so focused on avoiding, high inflation of the 1970s, may actually be leading us to repeat some of the same mistakes the FOMC made in the 1970s: a faith-based belief in the Phillips curve and an under appreciation of the role of expectations”.

Finally, current polling indications suggest French President Macron’s En Marche party and its allies are on course to win as many as 365 seats in the 577 seat National Assembly, having already secured a majority.

Coming Up

A glance at this week’s calendar of economic and other known market events is far from inspirational in terms of its potential to drive significant market moves.  That said, it’s often the case that weeks with big set-piece event risks fail to produce significant market volatility, and week’s that start off looking benign for markets end up anything but.

Coming out of pre-FOMC purdah, Fed speak will come thick and fast. After Kaplan and Kashkari on Friday, appearances are scheduled from Messrs Dudley (tonight) Evans, Fischer, Rosengren, Powell and Bullard as well as Loreatta Mester.  As at Friday’s close, markets were pricing the chances of one further quarter point rate rise by the end of the year at just under 50%.

Other central bank events this week are the minutes of the RBA’s June meeting on Tuesday and the RBNZ OCR decision and statement on Thursday.  Neither should be particularly market moving.  A Reuter’s poll on Friday shows no-one expects anything from the RBNZ this week, but 14 of 20 economists polled see rate hikes by Q3 2018 (against the banks latest OCR track suggesting no move until later in 2019). The Bank of Canada next week will likely be far more interesting, after comments from them last week implying they have shifted to a tightening bias.  RBA Governor Lowe is appearing on a panel this morning at the Crawford Australian Leadership Forum in Canberra (09:30 AEST).

Economic data of significance is very thin on the ground. In Australia, its Q1 House prices on Tuesday where an average nationwide rise of 2.2% is expected to be reported (8.9% y/y). Indications of falling prices from CoreLogic (but which may be merely seasonal) post-date Q1, rendering the official figures less interesting.

US data is all 2nd tier (durable goods orders the highlight) with Eurozone flash June PMIs on Friday probably the pick of the crop.  UK Brexit negotiations start today.

Overnight

On global stock markets, the S&P 500 was +0.03%. Bond markets saw US 10-years -1.23bp to 2.15%. In commodities, Brent crude oil +0.96% to $47.37, gold+0.1% to $1,254, iron ore +0.9% to $55.75, steam coal +0.1% to $80.85, met. coal +0.0% to $144.00. AUD is at 0.7623 and the range since Friday 5pm Sydney time is 0.7576 to 0.7630.

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