April 28, 2016

Markets Today: Down down (prices are down)

So it is that following yesterday’s CPI report, NAB altered its 3 May RBA call to now expect a 25bs reduction in the Cash Rate (to 1.75%).

I was hoping never to have to resort to Status Quo’s only UK No.1 hit for a title, even more so it’s tortured mangling into a commercial for a major Australian supermarket chain. But sometime, as the saying goes, ‘if the cap fit, wear it’.

So it is that following yesterday’s CPI report, NAB altered its 3 May RBA call to now expect a 25bs reduction in the Cash Rate (to 1.75%), seeing little risk in taking advantage of the extraordinarily low CPI (in fact, at an average of 1.55% for the two underlying measures, the lowest rate in the history of RBA inflation targeting). Market pricing as of last night’s close sits at about 50:50 for a 3 May cut.  AUD/USD has lost another quarter of a cent on its Sydney closing level (to near 0.7575 from around 0.7600, having been as low as 0.7550 immediately post-Fed). Further falls in iron ore prices – off another $1.69 to $61.09 and nearly $10 off last week’s highs – have not gone unnoticed.

As for the Fed, they have just come and gone to very limited fanfare. Concerns about international development were dialled down from being a ‘risk’ in March to now merely being ‘taken into account’. Slower growth, specifically in household spending, was acknowledged and as will be evident in tonight’s Q1 GDP report, though labour market improvements were re-instated to first place in the Fed’s word-ordering. The March acknowledgement of higher inflation was dropped in favour of ‘inflation has continued to run below the Committee’s 2% longer-run objective’.

As for market reactions, US bond yields and the dollar underwent knee jerk moves higher on the dialling down of international concerns, before being fully unwound (and then some) in the case of bond yields.  In index terms the dollar is now virtually flat to pre-FOMC levels. Equities liked the ongoing relaxed attitude of the Fed statement. After a very momentary dip, the S&P rallied by 0.7% to 2100 before giving back about a third of those gains into the close.

Post-Fed, we remain comfortable with our view for them  not moving rates up at least until July, bearing in mind the UK EU referendum that falls a week after the mid-June FOMC – however much ‘Brexit’ risk is seen to have diminished in recent days. Gavin Friend’s post FOMC write-up is included below.

The RBNZ has just delivered a ‘no change’ decision (2.25%) OCR decision, in line with the consensus view (we had been just in favour) of a cut. The easing bias is retained as is the stated desirability of a weaker NZD. This hasn’t prevented the NZD from quickly adding a cent to its pre-RBNZ levels.

Coming Up

Three down (local CPI, Fed and RBNZ) one to go (Bank of Japan). The ANZAC-shorted week to date has been anything but dull, and such is the uncertainty surrounding what the BoJ will or will not do today that it could well be a lively afternoon, in FX-land at least. The BoJ should announce its latest decision 30 minutes or so one side or the other of 2:00pm AEDT on past form, though such is the potential complexity of today’s announcement it could well come later rather than sooner.

We look for the BoJ to announce an increase in the target for its ‘QQE’ asset purchases from the current ¥80tn. annual rate (to as much as ¥100tn.) and which will likely include increased buying of ETFs (equity derivatives) from the current 3.3tn annual rate to as much as ¥7tn.  The deposit rate is only likely to be cut further (we expect to -0.2% from -0.1%) in conjunction with a scheme that will effectively allow Japanese banks to get paid to borrow from the BoJ.  This is crucial if bank stocks – and with that the broader equity market – is to take a new BoJ easing programme well.  In turn, this is crucial to the fate of all things Yen. If stocks like what they hear today, chances are the yen will weaken.

Before the BoJ, we’ll get the end of month slug of Japan March data, covering CPI, industrial production, household spending and retail sales. The BoJ’s currently preferred CPI ex food and energy measures is expected to be unchanged at +0.8% Y/Y but just 0.3% (also unchanged) in Tokyo – which leads the nationwide series by a month.

Australian has Q1 trade prices (NAB forecasts export prices to be -2.9% and imports prices -1.3%, implying a softer terms of trade in Q1 and so highlighting a disconnect between the (much) stronger AUD since January and the (weaker) terms of trade.  There is also NAB’s on-line retail index and its latest commercial property survey.

The data action continues offshore with German preliminary CPI (and where the EU harmonized measure is seen falling back to 0.0% from 0.1%) and US Q1 GDP – latter expected at 0.6% (annualized rate).


On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years -7.63bp to 1.85%. On commodity markets, Brent crude oil +3.15% to $47.18, gold+0.6% to $1,249, iron ore -2.7% to $61.09. AUD is at 0.7595 and the range was 0.7576 to 0.7606.

Good luck

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