Markets Today: Animal

Looking through Spotify this morning I was surprised to see that “Animal” is quite a popular song title. I was going with Pearl Jam 1994 hit, but then I noticed I could have gone with Deft Leppard or more recently Ellie Goulding or Kesha would have also done the trick.

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Well, the US animal spirit is back with a trifecta of better than expected data releases and with concerns over US-North Korean tensions abating and yesterday’s upbeat message from Fed Dudley still resonating, the USD and UST yields are higher, safe haven assets have been sold and US equities look to be taking a breather after a decent jump in the previous day. The VIX has edged lower again and it has closed at 12.04, down 33bps on the day.

July US retail sales beat expectations (0.6% m/m vs 0.3% exp., ex Autos 0.5% vs 0.3% exp.) and recorded the biggest monthly gain since December. The July gains were broad based and the May and June figures were also revised upwards. Meanwhile the Empire State Index jumped to 25.2 in August well above the 10 pencilled in by economists and now the index sits at its highest reading since September 2014. Finally, August NAHB index of homebuilder activity and sentiment rebounded to 68, from 64 in July, well above the 64 expected by consensus.

So with concerns over US-North Korean tensions abating and yesterday’s message from Fed Dudley still resonating in markets, the message from US data releases overnight is that the US economy is having a great start to the second half of 2017. Thus, the data releases have helped reinforce the positive economic outlook delivered by Fed Dudley yesterday helping UST yields and the USD track higher.

DXY (USD Index) has been on an upward trend since the start of the week and although some of the gains recorded post the release of US retail sales overnight have been retraced, the upward trend is still intact. DXY is up 0.47% on the day and after trading to an overnight high of 94.139 it now trades at 93.854.

Looking at G10 currencies, JPY is the big underperformer against the USD, down almost 1%. USD/JPY has followed the move higher in UST yields and after punching through the ¥110 mark yesterday, it now trades comfortably above the figure at ¥110.69.NZD and GBP are the other two main underperformers, down 0.73% and 0.71% respectively. The Pound’s underperformance has come from softer than expected July CPI figures (2.6%y/y vs 2.7% exp., core 2.4% vs 2.5% exp.) serving to further reduce expectations of any BoE hiking action this year. After spending most of yesterday’s day session range trading around 1.2960, GBP now trades at 1.2868. As for the Kiwi, most of its underperformance came during Europe’s trading hours. The move lower was unrelated to any news and reflects NZD’s current vulnerability to the downside amid extreme long speculative positioning. This morning GDT dairy auction defied some of the more positive indicators leading up to the auction and showed a slight fall in pricing. NZD down trades at 0.7236 and it has essentially closed near the lows of the NY session.

Meanwhile AUD has had a fairly steady night, after gapping about 25pips at the London open (again unrelated to any news and like NZD reflecting downside susceptibility amid extreme long speculative positioning), it has essentially range trade and now trades at 0.7821.

Looking at bond yields, 10y UST traded to an overnight high of 2.28% and have ended the day close to the highs at 2.2728%. The 2y year tenor shows a similar pattern reaching an overnight high of 1.35%, ending the day at 1.3465%, 3bps relative to its previous close. Stronger US data releases have pushed pricing expectations for a December hike to 42%, up from yesterday’s pricing of 37%.

A brief look at commodities paints a mixed picture. Oil prices are little changed (Brent dipped to an overnight low of $50.11, but now trades at $51), Copper is also flat, unsurprisingly gold is down 1% and iron ore is down 1.4%. Two reports overnight painted a grim outlook for iron ore, with Citi raising over supply concerns while Axiom capital warning the potential for an acute correction over the next four months.

Meanwhile in other news the IMF increased its estimate for China’s average annual growth rate through 2020, but warned that it would come at the cost of rising debt that increases medium-term risks to growth.

Coming Up

We have a pretty light calendar during our session with Australia’s Q2 wage price index the main highlight. UK employment data and the EU 2Q GDP second reading are the two main events in Europe. Then tonight the US gets building permits and housing starts (both for July) ahead of the July FOMC Minutes early tomorrow morning.

Our economists expect Australia’s wage Price Index to print at 0.5% in Q2 taking the y/y reading to 1.9%. If correct, this means that in real terms wages growth were unchanged over the 12 months ending June 17 (see chart of the day below). Looking ahead, however, our economists note that wages growth should pick up in Q3 helped along by the 3.3% increase in the minimum wage, (effective July 1) in addition to a gradual tightening in the labour market.

The market expects an unchanged UK unemployment rate at 4.5% over the three months to June and weekly earnings ex-bonus are also expected to have remained steady at 2%. Not ideal given current inflation is running at 2.6% and is expected to head towards 3% by year end.

The July FOMC meeting early tomorrow morning will be assessed to see the degree of conviction the Committee has on the outlook for inflation. The Minutes will be also studied for any hints on the likelihood of the Fed announcing it balance sheet unwind strategy at their next meeting in September. Yesterday Fed Dudley noted that market expectations for a September announcement were not unreasonable.

Overnight

On global stock markets, the S&P 500 was -0.05%. Bond markets saw US 10-years +4.38bp to 2.26%. In commodities, Brent crude oil +0.22% to $50.84, gold-1.0% to $1,271, iron ore -1.4% to $73.68, steam coal -0.5% to $94.95, met. coal +0.0% to $193.50. AUD is at 0.7822 and the range since yesterday 5pm Sydney time is 0.7808 to 0.7877.

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