This news is not going to go away with the Democrats agitating for copies of memos.  This all comes on the heels of the sharp dive in the US Economic Surprise Index, last week’s further softness in US inflation, now politics intervening to add more noise into a market already wondering whether the US economy is slowing or not.

The market overnight has seen a sharp dive in US stocks, the Trump reflation trade now totally unwound as far as the big dollar and US Treasury yields are concerned.  The USD is under pressure, while the VIX is up sharply, closing at 15.59, up 4.49 index points, or 46.4%.  US bonds have rallied sharply, and gold is higher.

The market is holding – at least for now – to an above 50% view that the Fed will still hike at the June 14 FOMC, but that priced-in probability is naturally under pressure too.  The market understands that the Fed policy is very sensitive to any material lift in market volatility.  Were such volatility to continue, at the minimum the Fed would be delaying a rate rise beyond June.

The Dow has dropped 374 points, down 1.78%, with a similar story for the S&P 500, the Nasdaq down a larger 2.6%.  All sectors bar Utilities have declined in the S&P, while the KBW bank index down 4.08% and the Dow Transport Index down 3.08%.  US Treasury yields have slumped, 10s down a cool 10bps to 2.22%, 2s holding up relatively, down 5.3bps to 2.22%.  Gold has risen $24.80/oz to $US 1261.20, up 2.01%, WTI oil up $0.30 to $48.96.

The Bloomberg spot dollar index is down 0.50%, the largest gainers on the FX leader board being the yen (+1.47%) and interestingly the Kiwi (+0.78%).  The Euro is up 0.47%, while Sterling and the Aussie have flat lined.  The AUD has continued to trade in the lowish 0.74s ahead of today’s employment report and even after yesterday’s statement from S&P affirming Australia’s AAA sovereign rating and maintaining the negative outlook.  Spot iron ore was up $1.03/t yesterday to $62.20, with met coal and steaming coal up, though somewhat less.

European economic news saw mixed news from the UK labour market report with faster than expected employment growth, record low unemployment but with slower growth in wages.  Sterling rallied a little from that, also supported by USD subsequent weakness.  Euro CPI rose from 1.5% to 1.9% as expected, core CPI also in line at a steady 1.2%.  There was no significant US economy news.

Coming Up

First up today is Japanese GDP, the market expecting to see growth for Q1 of 0.5% q/q, up slightly from 0.3% in Q4.  The bigger picture for the USD/JPY remains the volatility in the USD.

Today’s AU labour market report for April should, if the leading indicators of labour demand are at all right, be consistent with some further return of a lift in the trend rate of employment growth.  ABS employment has been under-clubbing relative to such indicators for quite some months and a complete reversal of last month’s for once stronger than expected +61K rise would be a disappointment to the market.  NAB’s “pick” is a gain of 10K in total employment, sufficient to push the unemployment rate back to 5.8%.  We’ll be alert to any potential noticeable impact from Cyclone Debbie on Qld and (north coast) NSW.

Also out this morning are NZ Consumer Confidence and AU Consumer Inflationary Expectations for May.  Last month, consumer inflationary expectations were stable at 4.1%, with the mean of responses in the 0-5% range stable at 2.5%, bang in line with the middle of the RBA’s 2-3% target band.  Another such sign in May would be a little more reassurance for the RBA expectations that core inflation and wages growth remain stable.

Tonight’s UK retail sales will be the second leg of key consumer-related reports after last night’s labour market report.  ECB President Draghi is speaking in the wake of the French Presidential election, though we expect him to remain quite cautious rather than spooking markets too much by sending the Euro higher on any firmer hints of slowing down ECB QE.

There’s also a smattering of US reports, including weekly jobless claims, running of late at multi-decade lows, the Philly Fed survey, and Fed President Mester speaking.  And there’s always the potential (likelihood?) for more news from the White House.  Treasury Secretary Mnuchin is speaking so the market will be alert to any views he has to offer on the economy, trade, currencies and indeed the Administration’s tax and infrastructure plans, all being put to one side for now it seems.

Overnight

On global stock markets, the S&P 500 was -1.82%. Bond markets saw US 10-years -10.14bp to 2.22%. In commodities, Brent crude oil +0.66% to $51.99, gold+2.0% to $1,261, iron ore +1.7% to $62.20, steam coal +0.8% to $73.80, met. coal +0.3% to $173.00. AUD is at 0.7433 and the range since yesterday 5pm Sydney time is 0.7389 to 0.7444.

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• Markets Today: 18 May 2017 (PDF,110kb)

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