Shifting balance of risks sees February 2025 firm for first rate cut – but easing still likely gradual.
Insight
The two most significant development overnight were a 1.0% surge in the Euro (Euro now fetches 1.1089 – the highest since November 9 2016), and continued weakness in the US dollar with the DXY down 0.7% overnight and at its lowest point since just after the US the election.
Given the dream run for Europe recently you will have to forgive me for drawing on Eurovision song titles as inspiration for today’s daily. As an avid watcher I thought the winner and runner-up this year were a fitting tribute: Amar Pelos Dois (translated as “Love for Both of Us”) by Salvador Sobral and “Beautiful Mess” by Kristian Kostov, though I do prefer a Beautiful Mess.
The big secular theme over the past couple of months has been long Europe. European data continues to be broadly positive, reinforced overnight with the German ZEW index rising to 20.6 from 19.5 and the Trade Balance coming in better than expected with the surplus rising to €23.1bn from €18.8bn. Those prints also likely helped set the tone for the Euro’s rise overnight, but it is important to note this is part of a trend that emerged following the first round of the French presidential election. Abating political risk is also is driving speculation that the ECB will slightly alter its guidance at the June meeting by removing the words “or lower” from the pledge to have unchanged or lower rates for the foreseeable future. Our view of the Euro trading around €1.10 in June is now clearly tilted to the upside. Optimism has also spread to other European currencies: Franc (+1.2%) and Norwegian Krone (+1.1%) all higher.
US dollar weakness extended overnight with the DXY now at 98.12, around the lowest levels since November 9 (the US election was held on Nov 8). The dollar was weaker against all G10 currencies. The soft CPI figures last week set the tone, while the notion that Trump’s tax plan and infrastructure packages could be delayed or watered down has grown – especially given recent political distractions such as Trump’s disclosure of classified information to Russia’s foreign minister.
Highlighting investors’ concerns around Trump’s policies, the inflation outlook has moderated with the 10-year inflation breakeven now falling to 1.84% – just near the levels following the US election. Breakeven inflation rates did peak at around 2%, so this suggests investors’ inflation expectations are moderating despite oil prices stabilising. Nevertheless, nominal bond yields remain resilient with US Treasury yields at 2.32% (down 1.9bps overnight), while markets are still pricing in a 70% chance the Fed will hike rates in June.
Given a more positive Europe, German Bund yields rose overnight, up 1.5 bps to 0.44%. With Bund yields rising and US Treasury yields falling the Bund-UST spread has fallen to a fresh 2017 low.
Supporting a June Fed rate hike, US Industrial Production figures were better than expected, up 1.0% in April and well above the consensus of a 0.4% rise. Although the market hardly moved on the data, it does suggest some of the “hard” data is starting to catch up to the more optimistic “soft” data – the manufacturing component in particular now looks broadly consistent with that implied by the ISM. Nevertheless, the overall run of data continues to be patchy with Housing Starts overnight disappointing (1,172k v expectations of 1,260k).
The Aussie and the Kiwi were the underperformers overnight. The Aussie rose 0.2% while the Kiwi was unchanged against a US dollar that fell 0.7% across the board. The Aussie hardly moved on the RBA Minutes yesterday with the RBA continuing to watch the labour and housing markets closely. NAB sees the RBA on hold in 2017 and 2018.
Finally UK CPI came in a touch stronger overnight at 2.7% y/y against expectations of a 2.6% outcome. Nevertheless there was little reaction given the Bank of England seems content to allow inflation to return to target in a somewhat longer timeframe.
Domestic focus will be on the Wage Price Index (11.30am AEST) and the Westpac-MI Consumer Confidence survey (10.30am AEST). There is little on the international calendar today with the highlights being Japanese Industrial Production and Machine Orders, UK Labour Market Statistics (where focus will be on wages – markets expect a 2.4% y/y outcome), and the final reading on April Eurozone CPI.
For the Wage Price Index, NAB is similar to the market in expecting still soft wages growth of 0.5% q/q, which would keep the annual pace unchanged at 1.9% y/y. Such an outcome could signal the bottoming out of wages growth which has been consistently surprising to the downside and is important for the RBA with the Bank assuming wages growth “to remain at around its current rate over the next year..[and] then expected to pick up gradually over 2018 and 2019”. Today’s wages numbers will also be watched closely by those in Treasury who are expecting wages growth to pick up to a 3¾% by 2020-21.
Although Consumer Confidence does not typically ruffle any feathers, this month’s read will be looked through the prism of the Federal Budget and taken as whether consumers endorse the Budget or not. Yesterday’s weekly measure suggests not – this measure fell to its lowest level since September 2015 and is also indicative of slight downside risks to the monthly measure.
On global stock markets, the S&P 500 was -0.08%. Bond markets saw US 10-years -1.94bp to 2.32%. In commodities, Brent crude oil -0.48% to $51.57, gold+0.5% to $1,236, iron ore +0.6% to $61.17, steam coal -0.1% to $73.25, met.coal -0.9% to $172.50. AUD is at 0.743 and the range since yesterday 5pm Sydney time is 0.7395 to 0.7437.
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