Fed's Waller inches open the US rate cut door
Phil Dobbie asks NAB’s David de Garis if this is the end, or the start of it?
The US market has returned after the break on Monday overnight, trading in risk-off mode. The catalyst seems to have been the announcement on Sunday from the Chinese Ministry of Finance that it is increasing tariffs on up to 128 US products, higher tariffs on frozen pork, wine, aluminium scrap, and certain fruits and nuts, in response to the US tariffs on steel and aluminium, and broadly as forewarned, China having signalled tariffs on up to $3bn of US imports. The Nasdaq has seen larger losses in the wake of a tweet from the US President @realDonaldTrump on Twitter if you’d like to stay up to date) on how the US Postal Service is losing money from Amazon deliveries; “THEY LOSE A FORTUNE”, he tweeted overnight. Amazon stock is down 5.2%, the Nasdaq down 2.7%. Bonds have been generally been supported but without a sizeable rally, while in the currency space, the Yen has re-emerged as the weapon of choice, the AUD and the NZD back to lower levels again.
Data released since we left on Thursday has been quite market friendly. The US personal income and spending report for February out Thursday showed real consumer spending for February as flat after a downwardly revised 0.2% January dip (a slight disappointment after the tax cuts announcements), while the core PCE deflator was exactly in line with expectations at 0.2%/1.6% after 0.3%/1.5% in January, suggesting the Fed will continue on its “gradual removal of policy accommodation” path. The PCE deflators are playing to the tune that inflation is on the rise in the US, having averaged 0.20% over the past six months, annualising to a rate of ~2½%, US inflation back at the Fed’s target in essence. The preliminary German CPI for March missed expectations by a tenth at 0.4%/1.5% (L: 0.5%/1.2%, consensus 0.5%/1.6%).
The other big release over the weekend were the official Chinese PMIs for March, some of the first post Lunar New Year readings on the economy. The Manufacturing PMI rose to 51.5 from 50.3 and above the 50.6 consensus and inferring that manufacturing growth is running on a similar track to the second half of 2017 when this index averaged 51.8. The Non-manufacturing index was virtually unchanged at 54.6 (L: 54.4)), while the follow-up Caixin reading on Manufacturing came in at 51.0, down from 51.6.
The overnight release of the US ISM Manufacturing report for February was another blockbuster-type number at 59.3 in March after 60.8 In February. It did reveal that the Prices Paid component jumped to 78.1 from 74.2, US manufacturers reporting increasing costs pressures, including from steel and aluminium, prices for which were already higher even before the US tariff increases. In the wake of the ISM report overnight, the Atlanta Fed’s GDPNow estimate has been nudged back up to 2.8% from 2.4%, on a par with the upwardly revised 2.9% for Q4 released last week.
As we go to print, the AUD/USD is hovering just above 0.7660, with the AUD/JPY back just over 81. The moves in currencies in this last wave have been relatively orderly, with bond yields barely lower in the 10s and down 2bps for two year yields. We would expect that while today’s RBA post-Board statement will show no urgency in lifting rates, they nevertheless are watching local and offshore events closely. The local and overseas growth story continues, while trade/tariff news remains unsettling. Last week’s local labour market report revealed that a degree of spare capacity remains in the labour market with a sticky unemployment rate and no change in the broader under-utilisation rate over the past quarter despite still vibrant employment. More likely, markets will take a lead from tariff/trade news, upcoming local retail sales tomorrow and US payrolls at the end of the week.
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