Below trend growth to continue
The perception of a lower for longer Fed has slowly but surely brought back an improvement in risk sentiment.
The perception of a lower for longer Fed has slowly but surely brought back an improvement in risk sentiment. Global equities had another positive night, oil prices edged a little bit higher and risk sensitive currencies have outperformed with the AUD at the top of the leader board.
Euro stoxx index ended the day at 1.29% while in the US a late selloff in bank and pharmaceutical shares took some of the gloss out of the day. The DJ( +0.1%) and S&P500 (+0.13) managed to eke out some gains while the NASDAQ slipped into negative territory.
The USD is weaker against all G10 currencies with the exception of the SEK. The AUD (1.18%) is at the top of the leader board aided by yesterday’s RBA neutral policy stance (see more below). Next in line is the NZD (0.72%) benefiting from the risk on mood and its links to the AUD. A less dovish RBNZ on Thursday could well see these two currencies swap places tomorrow. Meanwhile, GBP (0.68%) remains the most volatile G10 currency with moves dictated by contradicting polls suggesting a majority is either with “Brexiters” or “Bremainers”.
In commodities, WTI is back above $50 and Brent is $1 higher at $51.41. Gold is unchanged at $1244.7, Copper had a bad night, dropping 3.8% and iron ore has gained another 2.8%, ending the day at $52.5.
The expectation of a lower for longer Fed has continued to weigh on core global yields. 10y Bunds fell 3.6bps overnight and ended the day at 0.048%. Meanwhile, 10y US yields are still flirting with a break sub 1.70%, they are currently at 1.717%, 2.5bps lower on the day.
The RBA left the OCR unchanged at 1.75% and somewhat surprised many in the market by moving to a neutral stance. NAB has maintained its forecast of unchanged interest rates in the immediate future. The Statement suggests the RBA’s May easing is currently seen as sufficient to return inflation to target and achieve sustainable growth. That said, inflation remains important and a low Q2 CPI print (due out 27 July) could still trigger a cut further down the line.
As for the AUD, it’s worth noting that the RBA is seemingly happy where the currency is right now. The Statement noted that a lower currency and pick up in in credit to businesses have assisted the economy to make the necessary economic adjustments. However the Statement also notes that an appreciating exchange rate could complicate this. Ironically with the USD vulnerable to the downside, post the dismal payrolls and Yellen’s cautious speech, the move to a neutral stance by the RBA has given the AUD a reason to trade higher and after yesterday’s pop the AUD is almost back to where it was before the RBA cut in May.
Late in April we noted that the AUD was starting to look expensive relative to fundamentals. Back then the AUD was trading around the 78cent mark and iron ore was heading towards $70. The AUD is not expensive today, but as a rule of thumb these levels could be useful to keep in mind for future reference.
Finally in terms of data releases, the Eurozone Q1 GDP was revised up slightly to 0.6% from 0.5%, US non-farm productivity was also revised up to -0.6% from -1% and China’s May FX reserves printed at $3.191bn, fairly close to expectations of $3.2bn ($3.219 bn prev).
In Australia this morning we get housing finance approvals for April. In March, total finance approvals were almost unchanged, declining 0.2% m/m. Owner-occupied fell 0.9% m/m, but investor housing approvals climbed by 1.5% m/m.
NAB expects the headline number of owner-occupied approvals to rise by 2.6% in April and we will also be interested to see if investment lending rose again.
Looking at offshore markets the data focus will be in Asia. This morning Japan prints its final reading for Q1 GDP along with its current account for April and at midday we get China’s trade figures for May.
For China’s trade data, consensus forecast is for exports in yuan terms to rise 1.5% yoy, down from April’s jump of 4.1%, however recent business surveys suggest the risks are to the downside. As for Japan, GDP is likely to be revised up to 1.9% qoq sas from the advance estimate of 1.7%. Meanwhile the recent theme of weak Asian demand is expected to still weigh on Japan’s exports.
The data highlight in Europe will be the UK’s industrial production (April) and for the US it will be the Jolts report. In March the Jolts report jumped 2.7% and it will be interesting to see if we get a correction in April. Finally, we have no Fed speakers on the roster today and in fact now we won’t get any speakers until after the 16 June FOMC meeting.
On global stock markets, the S&P 500 was +0.13%. Bond markets saw US 10-years +3.63bp to 1.72%. In commodities, Brent crude oil +1.84% to $51.41, gold-0.0% to $1,245, iron ore +2.8% to $52.54. AUD is at 0.746 and the range since yesterday 5pm Sydney time is 0.7433 to 0.7452.
For full analysis, download report
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.