A further slowing in growth
Last night’s Federal Budget contained few surprises and won’t be a big influence on markets this morning.
The US 2/10s yield curve has (briefly) inverted in the last few hours, but the bigger market story has been a further lift in optimism toward some sort of Russia-Ukraine peace agreement, showing up in strong outperformance by European stocks, $2-2.50 off oil prices (losses since halved) and a near 1% rise in the EUR/USD exchange rate (with AUD/EUR down a whole big figure before partially retracing). Last night’s Federal Budget contained few surprises and won’t be a big influence on markets this morning.
The long heralded inversion in the 2s/10s US Treasury yield curve finally arrived in early afternoon New York trading, with 2s above and 10s below 2.39% but it has been a very fleeting affair so not yet ‘counting’ as a nailed on US recession indicator (indeed, since the brief inversion, the curve is back to +3-4bps). So the news headline writers haven’t yet got their field day, even if has gifted a suitable song title for today’s missive.
The headlines out of Ukraine that have caught markets attention include comments about a ‘pathway’ for direct talks between presidents Putin and Zelensky being opened up by current negotiations and claims by Russian officials that It is curtailing its military activity around Kyiv. US Secretary of State Anthony Blinken’ s response to this has been to distinguish between ‘what Russian says and what Russia does’, stressing his focus is firmly on the latter.
Equity markets continue to need only the slightest encouragement to push on up, and the Ukraine related headlines have spurred a 3% rally in the Eurostoxx 50 which has in turn fed a stronger US market where the S&P500 has just finished +1.2% and the NASDAQ +1.8%. Energy is the only S&P sub-sector in the red (-0.4%) thanks to lower oil prices; IT (+2.06%) and real estate (2.85%) are the best two performing sectors. On the latter, latest Case-Schiller house price data shows a 19.1% average nationwide price rise in the year through January, though more up to date indicators show clear signs of a softening housing market, driven by the big jump in 30-year mortgage rates in recent months.
The more significant US data overnight was the Conference Board’s Consumer Confidence measure, up to 10.7.2 from a revised 105.7 and close to expectations, with the present situation reading up 10 points thanks to rapidly declining Omicron case numbers, while the expectations reading fell 4.2 points – higher prices (gasoline especially) responsible here, and where inflation expectations rose to 7.9% from 7.1%. JOLTS job opening meanwhile remained at an exceptionally high level, 11.266 million vs 11.28mn last time, above the 11.0 million expected.
In Fed speak, Philadelphia Fed President Patrick Harker – not a 2022 FOMC voter – who admits that the central bank played role in stoking high inflation, predicted “a series” of increases in a key short-term U.S. interest rate this year and said he is “very open” to a half percentage point hike. Harker also anticipates “that we will begin to reduce our holdings of Treasury securities, agency debt, and mortgage-backed securities soon.” Harker had previously revealed he had pencilled in seven quarter-point rate increases in 2022, but he said he is “very open to going faster” and “wouldn’t take a 50-basis point increase off the table for the next meeting.”
ECB comments of note include a Politico interview with chief economist Philip Lane , who stuck to his view that high inflation is temporary and will ease – despite the war. ““Most of this inflation will fade away … the momentum where every month you wake up and you read that inflation is higher than the previous month — that element, the momentum element — we do think will decline. We do think that inflation will decline later this year and will be a lot lower next year and the year after compared to this year.” Meanwhile Austrian Governing Council (GC) member Robert Holtzmann (one of the hawks, ) who said the ECB should raise rates twice this year (to 0%) taking the Deposit Rate to 0% from -50bps currently). Another GC member, Bostjan Vasle, said only that he ‘wouldn’t exclude a rate hike in 2022”. And finally, GC member de Cos says that it is key to avoid second round (inflation) effects from the commodity price impact of the war.
Currency markets show jumps for EUR/USD of nearly 1% on the Ukraine news/optimism, only outdone by the highly risk sensitive SEK (1.8%) while the JPY is three-quartesr of a percent stronger, following yesterday’s step up in jawboning by Japanese officials, most notable the vice minister for international affairs Masato Kanda, aka ‘Mr Yen’ in previous iterations of this role – anyone remembers Mr Sakakibara? Kanda told reporters he discussed foreign exchange markets ‘for a long time’ with his U.S. counterpart Andy Baukol in a meeting Tuesday, that excessive moves in forex can have a bad impact on economy and that he will monitor yen impact on economy with a sense of urgency.
EUR/USD gains and USD/JPY losses see the DXY USD index down 0.7% this morning relative to Monday’s NY close. The AUD/EUR cross was briefly down to as ‘low’ as 0.6720 from above 0.6820 on the EUR move, but losses have since been halved (currently around 0.6780) with AUD/USD poking back just above 0.75
Last night’s Federal Budget spung few surprises and shouldn’t be market moving today or in the days ahead, beyond perhaps watching to see what impact if any it has on the Coalition’s near 10-point polling deficit to labor on a two-party preferred basis. As was the case in 2021-22, the Government has again chosen to spend a significant portion of the near-term improvement delivered by the better-than-expected economy but this is not repeated to the same extent further out in the forward estimates. The Budget forecasts the unemployment rate reaching 3.75% by September 2022, a quarter ahead of the RBA’s end year forecast of 3¾%. The unemployment rate is likely to move below 4% even earlier with NAB expecting a sub-4% rate next month. Year-average GDP growth of 3½% is expected for 2022-23. (The RBA had 4.75% in the Feb SoMP), and a CPI increase of 4¼% y/y in June 2022, which importantly is 50 bps higher than the RBA’s Feb SoMP.
Reflecting an important change to the fiscal strategy, introduced during the pandemic, there is no attempt to reduce the budget deficit more quickly and fiscal consolidation/stabilisation will occur gradually with nominal growth in the economy stabilising and then reducing debt as a share of GDP. The deficit is expected to fall to $43.1bn in 2023-26, equivalent to 1.6% of GDP.
Major policy initiatives were broadly as expected: a temporary 50% cut in petrol/diesel excise for six months (worth $3bn); a one-off $250 cash payment to welfare and pension recipients (worth$1.5bn); and a one-off $420 cost of living tax offset for low-and-middle-income earnings (worth $4.1bn); $17.9bn additional for road and rail; and $9.9bn for cyber capabilities.
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