It was an overnight session marked by two Fed speakers banging the drum (not as strongly as Keith Moon used to) warning that even the September 22 FOMC is not off the radar for a Fed rate increase.  Markets only took a little of that to heart, also soaking in a none too worrying outlook for the extent of US rate hikes from NY Fed President Bill Dudley, speaking on the Fox Business Network overnight.

The USD remains soggy, down for the session but getting some later support in the US session with US 2 year bond yields up 4-5 bps intraday on the back of Dudley’s comments, 2s ending the session a net two basis points higher.  Dudley’s said the market was too complacent on Fed pricing, sentiments supported by Dennis Lockhart, Atlanta Fed President, who said that if the FOMC was meeting today, the economic data stream would justify a serious discussion of a rate increase.  (Lockhart is a non-voter on the FOMC this year, while Dudley, as NY Fed chief, always gets a vote.)

After his “markets too complacent” remarks, Dudley was asked if the Fed could hike in September and said “I think it’s possible”.  He was careful not to hide his cautious side too much, including describing rate increases as “snugging up rates a little bit” and that “we probably don’t have a lot of monetary policy tightenings to do over time”.  Markets lifted the odds of a September move to a still modest 24%; a hike taking place in December was lifted to over a 50% chance.  (NAB’s forecast is that the data will justify a hike by the December 15 meeting.)

US data came and went with little market fallout, housing starts in July stronger than expected but permits somewhat softer.  Industrial production was little different from consensus; July m/m CPI missed expectations by a tenth, headline CPI at 0.8% y/y (from 1.0% in June) and core at 2.2% (2.3%).

In a mixed night for the USD, Sterling is back with a 1.30 handle this morning, the BoE managing to buy more gilts in its second tranche of its new Asset Purchase program (after last week’s falter).  UK CPI for July was pretty much in line with expectations; PPI was stronger than expected.

The overnight NZ Global Dairy Auction saw prices zip 12.7% higher in a gold medal performance, suggesting upside risk to Fonterra’s present milk price forecasts.   This result pulled the NZD up by its bootstraps, earlier struggling in the 0.7230 region, now trading around 0.7280, up against the USD that has received some belated support through the course of the session.  The AUD is trading back toward 0.77 this morning, traded commodities generally firmer, including oil, iron ore, copper and even gold a little.

Coming up

First up this morning is the June quarter NZ labour market report, markets expecting 0.6% growth in employment (BNZ forecasting 0.7%) that would see the unemployment rate ease back from 5.7% to 5.3%. It has to be said however that this is a reconfigured survey and so the potential for surprise looms larger, particularly so given Statistics NZ has taken another fortnight to double check the results that were initially slated for release on 3 August. That’s at 8.45 AEST.  Also being released then is NZ’s Business Price indexes.

Australia’s Wage Price Index for Q2 (11.30) should reveal still very low annual growth at 2.0%. This is a highly synthesised measure of underlying wages so barely moves by more than 0.1% in a quarter; we look 0.5% q/q.

Tonight the focus will initially be on the UK again with their monthly jobless claims/labour market report for June/July ahead of the Fed’s now uber-dove James Bullard speaking an hour before the release of the July 27 FOMC Minutes and whether this will fuel up US yields any more.

Overnight

On global stock markets, the S&P 500 was -0.55%. Bond markets saw US 10-years +1.70bp to 1.57%. In commodities, Brent crude oil +1.32% to $48.99, gold+0.7% to $1,357, iron ore +3.0% to $62.03. AUD is at 0.7695 and the range since yesterday 5pm Sydney time is 0.7674 to 0.7739.

For full analysis, download report:

•  Markets Today:  17 August 2016 (PDF, 119KB)

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