US equities fell overnight and the US Treasury curve flattened to its lowest level since 2007 after solid data and hawkish Fed talk increased market’s expectations of US rate hikes.

The US headline April CPI reading rose to 0.4% vs 0.3% expected while core CPI was 0.2%, in line with consensus. On an annual basis, core CPI dip to 2.1% from 2.2% in March and it would suggest there is downside risk to the core PCE deflator (the Fed preferred inflation measure) due for release on the last day in May.  US April industrial production rose 0.7%, well above the 0.3% expected and notably manufacturing output rose 0.3%, reversing the decline seen in March. US housing starts jumped by 6.6% beating expectations ( 1172k vs 1125k exp.), but permits were weaker printing at 1116k below the consensus of 1135k.

Reaction to the data helped short dated US treasury yields drifted higher, but later in the session comments from Fed speaker seemingly spooked the equity market and boosted the move higher in yields in the front end of the US Treasury curve. Fed Lockhart and Williams said two to three rate increases this year may be warranted while Dallas Fed President Kaplan said a hike may come soon.

The overnight session for the USD was a story of two half. In the early session the USD was on the back foot against most G10 currencies with US data releases only providing mild support. Later in the session, however, hawkish comments from Fed speakers boosted the USD, helping it recover over half of the early session’s losses.

Looking at the G10 currency leader board, the AUD is the top performer over the past 24hrs, thanks to the rally post RBA minutes which revealed no evident easing bias. GBP is also a top performer boosted by polls showing a majority for the remain vote while NZD got a small boost from the GDT auction overnight which came in at +2.6%.

The CAD and NOK lost a bit of ground against the USD, even though oil prices had another positive night. WTI gained another 1% currently trading at $48.53 while Brent is up 0.4% and is trading just under the $50 mark. Commodities in general also had a positive night with iron ore jumping 2.66% to $55.8, copper was +0.6% and gold gained 0.4% and is currently trading at $1281.1.

Coming Up

This morning in Australia we get the wage price index reading for Q1 (AEST 11:30am) and given the focus on inflation, this data release is likely to be watched closely by both the RBA and market participants. Expectations are for a rise of 0.5% in Q1, in line with the previous quarter.

RBA Assistant Governor Debelle speaks at the Beijing RMB FX Forum at 11:05 AEST and the title to his speech is “Developments in Global FX Markets and challenges in currency internationalisation from an Australian perspective”. We don’t expect the speech to be particularly market moving however we will keep an eye out in case we get any interesting headlines.

Japan Q1 GDP data and China’s April property prices are also out this morning. For Japan’s GDP data, Bloomberg is showing a consensus estimate of 0.3%QoQ SA annualized increase. If correct, this would suggest Japan narrowly avoided a technical recession. Given the BOJ apparent lack of urgency it’s hard to see the Bank embarking on further stimulatory measures at its June meeting unless the data start to surprise to the downside and the yen moves back below Y105.As for China April property prices following last month’s whopping 29% yoy rise in prices, talks of a housing bubble have begun to remerge again.  Private transaction data from property agency Centaline suggest a slower pace of price surge should be expected in April.

Last week the BoE noted that distortions from the Brexit referendum mean that the interpretation of economic data will be harder to read until the June referendum is behind us. Notwithstanding the UK March employment report due for release later today is an important indicator on the state of the economy, the market is expecting the ILO unemployment rate (3 mths) to remain unchanged at 5.1%.

All that said the big event for the day comes from the US with the release of the April FOMC Minutes. The April statement gave the impression the Fed was in no rush to lift the Fed Funds Rate anytime soon. The Minutes may provide some colour on the extent that global concerns (Brexit and China) are playing into the Fed thinking and whether two hikes before year end remains the base case scenario. The latter point in particular could be an important factor in determining if the nascent USD recovery has more legs.

Overnight

On global stock markets, the S&P 500 was -0.94%. Bond markets saw US 10-years +1.90bp to 1.77%. In commodities, Brent crude oil +0.75% to $49.5, gold+0.4% to $1,280, iron ore +2.6% to $55.78. AUD is at 0.7326and the range since yesterday 5pm Sydney time is 0.7315 to 0.7361.

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• Markets Today: 18 May 2016 (PDF, 87KB)

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