May 19, 2015

Markets Today: 7th Heaven

They might not exactly be skipping across Martin Place to work this morning, but there should be at least a small smile on the faces of RBA Board members that the Aussie dollar is trading back on a ‘7’ handle, following a night during which the US dollar had been bid across the board.

They might not exactly be skipping across Martin Place to work this morning, but there should be at least a small smile on the faces of RBA Board members that the Aussie dollar is trading back on a ‘7’ handle, following a night during which the US dollar had been bid across the board.

While comments from RBA Deputy Governor Phil Lowe got the ball rolling (downhill) during our time zone yesterday with his comments that the RBA still had scope to cut rates – albeit self-evident when rates are 2% and much of the rest of the world is at zero – it is renewed slippage in EUR/USD (down 1.2% on Friday night’s New York close) that has done most of the subsequent damage. This in turn looks linked to the apparent lack of substantive progress in talks between Greece and her EU creditors.  Comments in the past hour from Greek officials, including Finance Minister Yanis Varoufakis, that Greece is ‘very close’ to a deal with creditors (by which he mean inside a week) are being treated with probably justified scepticism.

US dollar strength has come despite yet another incoming US data disappointment, this time courtesy of the NAHB index of homebuilders’ sentiment, which slipped to 54 from 56 against expectations for a small rise to 57.

Something of an antidote to the recent gloom and doom on US data came from the San Francisco Fed last night (headed by FOMC ‘centrist’ but recently more hawkish John Williams). They issued a paper suggesting that Q1 GDP has tended to be consistently underestimated in recent years, and that applying a second round of seasonal adjustments to what are supposed to be already seasonally adjusted data, suggests Q1 GDP growth was more like 1.8% rather than the 0.2% currently reported (and widely expected to be revised into negative territory later this month).

US equities have performed better than they did Friday, culminating in yet another all-time record closing high for the S&P 500 (+0.3% to 2129.2) led by a rally in Apple shares after some constructive comments from veteran stock investor Carl Icahn (that the stock is undervalued and misunderstood, and that they should boost their stock buy-back programme). Sound like he’s quite long. We’ve also had US bond yields retracing most of Friday’s rally, with 10year yields up 9bps and 2s, which were down less than a basis point on Friday, up 4bps Monday.

Coming Up

In the words of our BNZ colleagues, “Today’s (1:00pm AEST) RBNZ Survey of Expectations will not escape the attention of any trader worth his or her salt. Note: there is a good chance that its 1-year annual CPI inflation expectation will lift, from its 1.1% level of last time (simply because we’re clicking forward a quarter, to be looking past the recent oil price impacts). Still, the real test will be in respondents’ views of annual CPI inflation two years hence. In the previous survey this dipped to 1.80%, from 2.06%”.

In FX, we’d judge that anything less than 1.8% will probably be used an excuse to further ratchet up expectations for June RBNZ easing, that rose on Monday to around 48% from 46%, and drive some further slippage in all things NZD.

First up this morning is the weekly ANZ-Roy Morgan Weekly Consumer Confidence ( 9.30am). While we do not usually place too much emphasis on this volatile measure, the survey will be the first read on consumers’ reaction to the Federal Budget.  Judging from the Fairfax/Ipsos poll published in the AFR yesterday, this was positive.

At 11:30AEST we’ll get the minutes of the 5 May RBA Board meeting, at which of course they decided to cut the Cash Rate to 2%.  After Deputy Governor Phil Lowe’s comments yesterday, that the ‘bank does not provide future guidance in months when it changes policy’ we shouldn’t be expecting to read explicitly that the Board retains an easing bias, albeit this is implicit from Lowe’s comments yesterday’s and the downward revised growth and inflation forecast presented in the May SoMP.

Offshore tonight, UK CPI, the German ZEW survey and US housing starts are the known highlights.

Overnight

On global stock markets, the S&P 500 was +0.30%. Bond markets saw US 10-years +8.96bp to 2.23%. On commodity markets, Brent crude oil -0.70% to $66.34, gold-0.0% to $1,225, iron ore -1.1% to $60.65. AUD is at 0.7990 and the range was 0.7977 to 0.8052. The range since Friday’s local close has been 0.7997 to 0.8062.  Indicative range today 0.7965 -0.8030 (For more market prices, please see p.2 of the pdf).

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