Fed's Waller inches open the US rate cut door
Direction was taken from the weakness in the Chinese equity market yesterday, as the overnight sessions provided little new news of its own.
Direction was taken from the weakness in the Chinese equity market yesterday, as the overnight sessions provided little new news of its own. The 6.15% drop in the Shanghai equity market prompted further declines in EM currencies and developed market equity markets were broadly lower. The anomaly was higher yields. The USD was stronger, with the oil producer Norway underperforming, followed by EUR. GBP outperformed afters its higher inflation outcome.
The drop in China’s equity markets highlights the settling process that markets go through as they adjust to different regulatory systems. An opening up of domestic, as well as foreign, access leaves them open to changes in sentiment and valuation judgements. Yesterday’s move doesn’t have one specific “reason” but a combination of fears arising from: modestly rising house prices announced yesterday may mean that there is less than expected policy easing ahead, or the largest liquidity injection into the money market via 7 day repos since the Lunar New Year yesterday (CNY120bn) failed to ease yields as had been hoped, or there were suggestions of an easing of the short selling rules. Or any other cause you might want to mention. With little going on elsewhere, it dominated the sentiment of global markets.
The capital outflows from EM are getting more and more attention and causing a greater amount of volatility in those markets. It has yet to really leech into developed markets. And that is fair; the re-pricing of the risks in these markets from a weaker China and a policy normalisation from the Fed are predominantly in these markets. But, the ball is rolling now, today the FT reports on the over $1tn outflows from EM in the past 13 months – more than during the financial crisis. That has the potential to slow economic growth, and in turn, that can tend to weigh on the AUD. It bears monitoring.
In the UK, the questions surrounding the BoE’s next hiking cycle returned, after a higher than expected pick up in inflation. Now don’t get excited, headline inflation remains at 0.1%yoy, but that is better than flat or negative as it has been. And, the core was a whole +1.2%yoy (0.9E, 0.8P) and with the comments from the BoE regarding the possibility of hiking, this brings the debate back on the table, despite the Governor’s will they – won’t they approach of late. It helped GBP outperform on the night.
In the US, the interest rate cycle lift-off is the persistent theme, but the housing data didn’t add much to that overnight. The starts and permits data were as could be expected, with starts higher and permits volatile and influenced by a change in building codes.
It was relatively quiet in Australia yesterday, with the RBA’s minutes already having been superseded by the Statement on Monetary Policy last week. They were a little more upbeat on the domestic economy, but cautious on the international side. Overnight, NZ dairy auction was improved after a decline in volume offered; prices were up +14.8%A, -9.3P.
Yet another day likely to be drifting in the Asian timezone, with little top tier data and an eye on the Chinese markets yet again. The weakness in the equity market yesterday, weighed on the AUD, so they will be hoping for re-assurance that policy easing will come if needed.
But the other market focus this year has been, and is likely to remain, the Fed. Two factors today will add to that debate: one looking at what has been and the other, what is to come.
The FOMC minutes will be dissected to see just how close the Fed are to a hike (was it “many” who are looking to normalise policy?), and what their bias and concerns are. Market wisdom at present, gleaned from various speeches, that there is likely to be a move unless the data deteriorates (what prompted the introduction of the word “some” improvement in the labour market?).
The guide to the pressures to come for the Fed is from the CPI release. This is expected to remain relatively low, with steady core inflation below the Fed’s target. Given this, there should be little reaction, but the bias for markets to react is likely to a stronger than expected outcome, rather than a surprisingly soft outcome.
Japan trade data has gone back to being of little interest to markets, after its role last year as a market mover. For the record the deficit is expected to improve and as such might get a fraction of a look in from markets if it is much worse than expected, but perhaps not if it is better.
Similarly, the Euro Area’s current account surplus doesn’t feature as part of what market’s find interesting. The build up in the surplus perhaps should be interesting, but isn’t.
On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years +2.47bp to 2.19%. On commodity markets, Brent crude oil -0.39% to $48.55, gold-0.1% to $1,117, iron ore +0.5% to $56.92. AUD is at 0.7344 and the range was 0.732 to 0.7386.
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