Rates to ease from Feb with a soft landing on track
Insight
Not a big night for markets.
US equities have just closed with small losses and where higher oil prices have assisted an afternoon recovery via the energy sector, after earlier weakness followed disappointing (some say dismal) results for both Macy’s and Kohl’s which dragged the broader retail sector lower. We’ll get US retail sales data tonight, where the focus will be whether the on-going disconnect between what US consumers say (reflected in buoyant consumer confidence readings ) and what they do (weak retail spending) has continued through April, or otherwise (see Coming Up).
In bonds, US yields are about 2bps lower out to 10-years, notwithstanding incoming economic data showing another very low level of weekly jobless benefit claims and producer price data that sprung an upside surprise on the headline ‘PPI Final Demand’ reading of 0.5% (0.2% expected) and on the core ex-food and energy measure (0.4% against 0.2% expected). We’d note though that on a month-to-month basis there’s only a weak correlation between PPI and what that might mean for tonight’s all-important CPI data (see Coming Up).
In currencies and looking at the last 24 hours, it’s very much a case of where central banks have spoken, their currency is weaker. This is of course most evident in the NZD which has barely picked itself up off the floor after the hit from RBNZ-speak this time yesterday. The floor is also the place where a fair few analysts’ jaws – including our own – dropped after the assertion of the central bank that it sees none of the inflation pressures that many in the market claimed beforehand as evidence in support of at least a nod in the direction of a 2018 tightening bias. In context though, the fall in the NZD only puts it back to where it was a week ago.
Sterling was the other victims of central bank speak, after the Bank of England repeated the 7-1 vote count for unchanged policy against some expectation that more than just the resident (and soon departing) MPC hawk Kristin Forbes might dissent in favour of immediate policy tightening. There were a few hawkish tones in the accompanying BoE narrative from Mr Carney, to the effect that rates could rise sooner than markets expect, but that this would be very dependent on both a smooth glide path into Brexit and a significant pick up in wages growth – two assumptions that look particularly heroic at this juncture. To be fair, though Sterling dipped on news of the 7-1 vote, the majority of the overnight drop in (almost 1% against the Aussie dollar) came after much weaker than expected data on industrial production (manufacturing output -0.6%) and construction output (-0.7%).
The AUD has ground out a small recovery overnight to sit at 0.7380 currently. Why? With the exception of iron ore (little changed) the metal complex is higher (both industrial and precious metals) along with oil.
Slim pickings from the economic calendar in the APAC time zone. The BNZ-Business NZ Manufacturing PMI is the highlight, last at a strong 57.8.
It’s a different story on the other side of the world, where a heavyweight US economic calendar includes latest CPI and retail sales numbers and the preliminary University of Michigan consumer sentiment index. These all come in the wake of a plunge in the likes of Citi’s US Economic Surprises index (from 60- in March to -20 currently). Retail sales were soft in March (-0.2% in headline terms and flat excluding autos) and are forecast to have bounced back quite smartly in April (0.5% and 0.6% for headline and ex-autos respectively). The industry data for auto sales in April was, we already know, weak. Of late there has been a disconnect between buoyant consume confidence reading and hard spending da ta and we get the first May reading on consumer confidence from the University of Michigan 90 minutes after retail sales.
CPI will be especially interesting, after the unexpected weakness in March that saw negative prints for both headline and core measures, the annual core rate of inflation dropping from 2.2% to 2.0%. We’ve also seen the Fed’s preferred core PCE deflator measure drop from 1.8% to 1.6% in March and average hourly earnings growth back to 2.5% from 2.9% at the end of 2016. Another significant downside CPI surprise tonight is one of the few economic releases with the potential to challenge current high expectations for the Fed lifting rates next month. The consensus expectation is for an unchanged 2.0% core rate.
On global stock markets, the S&P 500 was -0.21%. Bond markets saw US 10-years -2.32bp to 2.39%. In commodities, Brent crude oil +1.06% to $50.75, gold+0.4% to $1,224, iron ore -0.6% to $60.38, steam coal -1.1% to $73.30, met.coal -0.6% to $176.00. AUD is at 0.738 and the range since yesterday 5pm Sydney time is 0.7336 to 0.7382.
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