Overview

• This week’s article highlights that despite an awful lot of noise in markets (think North Korea, the US-China trade dispute, Oil and the Middle East and Italian political uncertainties), the boringly positive development has been that the central forecast for a slow improvement in Australian and global growth, continues to play out.
• While we should not become complacent about this fact – unknown developments frequently knock us off the central forecast path – the past six to twelve months have been somewhat unusual to the extent that forecast revisions have been relatively minor.
• The inference remains that while the RBA is currently in no hurry to move interest rates, if the forecast continues to play out as expected, at some stage the RBA will begin to lift its official cash rate.
• In markets, the week begins with news that Russia and OPEC are discussing increasing oil output, which has seen oil prices sharply lower. Interest rate markets have broadly been rallying over the past week or so mostly as a result of Italian political uncertainty, with lower oil prices likely further supporting the moves on Friday night. Currency markets have been mixed – the EUR mostly weaker on Italian developments. Higher oil prices also likely have been part of the story of softer European PMIs (along with cold weather), so lower oil prices may well help growth sentiment improve.
• This week, while Australian capex expectations will be closely watched to assess the progress of non-mining investment, together with any signs of an early lift in mining capex (it’s likely too early for the latter just yet given the larger new projects being talked about have long lead times), market participants’ focus will largely be on offshore developments. Next week is more important for Australia with the RBA June Board meeting and Q1 GDP, where NAB looks for a strong 0.8/0.9% q/q print.
• Offshore, the US PCE measure of inflation (Thursday), Non-farm Payrolls (and hourly earnings) (Friday) and ISM (Friday) will each be closely followed for clues as to how many further interest rate rises will be seen in the US this year. Fed officials seem to be trying to assess whether a prospective rise in inflation above 2% will prove temporary (a contention not supported by Prices Paid and Supplier Deliveries data in the ISM). The track of the unemployment rate below NAIRU should also influence market expectations about US wages growth. Europe also publishes CPI data on Thursday (oil likely to be an influence), while China releases its official PMI data on Thursday, which will be closely watched given some indications of manufacturing softening in Europe in recent months.

For further details, download the full report: Australian Markets Weekly 28 May 2018

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets