Below trend growth to continue
While the market is very sensitive to the CPI and the AUD and rates markets might see an immediate knee-jerk reaction, the market is not hanging on this number as one that might swing the RBA into action or inaction at upcoming meetings.
It’s been a night of relative flatness in European and US equities, OK-to-softer US data reads and mixed on the commodity front, with oil standing above the pack, WTI up $1.53 to $44.16 and Brent up $1.52 to $46. That seems to have been enough to lend some support to the commodity currencies, the AUD trading the session in the 0.77s, sitting this morning at 0.7745, among the best performers of the top FX currencies. Iron ore gave up another $3.29/t selling aided perhaps by a reported clamp down in China on speculative commodity trading. Dalian iron ore futures were down 1.85% and steel rebar futures off a similar 1.31%. Good luck to the Treasury forecasting iron ore in next week’s Budget. Base metals and gold were little changed.
Both key US data releases, durable goods orders and consumer confidence, were a little softer than expectations, though the confidence report from the Conference Board did also report its labour net plentiful index as improving further in April, consumers still upgrading their assessment of the labour market. The Atlanta Fed’s GDPNow estimate for Q1 GDP – ahead of its release tomorrow – though was upped slightly to 0.4% from 0.3%, thanks to higher estimates of residential investment and inventories offsetting softer business equipment investment. US Treasury yields eked higher, 2s by 3 bps and 10s by 1.6. Fed funds futures are fully priced for one rate hike by year-end and one more next year, still well shy of the FOMC’s March dot plot median expectation of two more this year.
Sterling appears to be building a base of support with the “remainers” doing better in the Brexit polls as the “project fear” campaign builds some momentum. Voters though seemed to take some umbrage at President Obama’s intervention into the debate during his recent visit, a very recent poll showing “remainers” dipped 2 points if still ahead at 51% cf 43 for “leavers”.
First up today is the NZ trade report for March at 8:45 AEST ahead of the weekly ANZ-Roy Morgan consumer sentiment index (it rebounded last week) ahead of the big one on the calendar today which is the AU CPI for the March quarter.
While the market is very sensitive to the CPI and the AUD and rates markets might see an immediate knee-jerk reaction, the market is not hanging on this number as one that might swing the RBA into action or inaction at upcoming meetings. The argument to keep rates steady has been won – at least for now – by the better domestic activity reports over recent months keeping the RBA relatively comfortably on hold, and with a more resilient $A. While the Bank has had an easing bias for many months now from low inflation (headline inflation has been below the 2-3 target range for five quarter now, with underlying inflation at a subdued 2%) it’s kept rates steady with still evident labour market trend improvement and an upbeat NAB Business Survey.
As for today’s number, NAB has a somewhat below consensus forecast for headline CPI of 0.1% q/q (L: 0.4%; E: 0.2%) while our underlying forecast is 0.5-0.6% (L: 0.5%; E: 0.5%) close to if a tad above consensus. As far as quarterly special influences are concerned, low banana prices might bend the figures even lower with the risk of an even larger fall in fruit prices than our 10% fall, a mirror opposite to a decade ago when Cyclone Larry decimated the crop and saw the CPI rise 1.7% in Q2 2006. Since preparing our bottom-up assessment, Wesfarmers’ comments last week that Coles supermarkets was having the highest rates of food deflation since mid-2013 points to some more widespread downside risk, food having a 16.8% weight in the CPI, thus also spilling over into underlying inflation.
NAB’s SME small business counterpart of the main quarterly business survey is also released at 11.30 as is China’s March industrial profits figures. There are two second tier releases from Japan ahead of the BoJ tomorrow, the All Industry Activity index at 14:30 AEST and their Small Business Confidence survey at 15:00 AEST.
Event risk starts kicks on tonight with the first cut of UK GDP. Growth of 0.4%/2.0% (after 0.6%/2.1%) is tipped; anything larger likely to propel Sterling further as recent Brexit fears have eased recently. Ahead of the FOMC (4:00 AEST tomorrow; followed by the RBNZ at 7:00 AEST) is the US goods trade and pending home sales. There will be interest in how much the FOMC statement (no forecast update nor Yellen presser at this meeting) might dial back their global risk assessment and how much to look through the Q1 slowdown given continued resilience in the labour market. Is June implicitly alive, semi-alive or unlikely? After tomorrow’s meeting, the next one comes June 14, nine days before the June 23 Brexit referendum.
On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years +1.43bp to 1.93%. On commodity markets, Brent crude oil +4.27% to $45.8, gold+0.4% to $1,245, iron ore -5.0% to $62.78. AUD is at 0.7749 and the range was 0.7748 to 0.7751.
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