A further slowing in growth
Markets have rallied hard on the back of the French Presidential elections on Sunday.
European equities have surged a massive 4%, while the Euro has risen 2.1% since the weekend to be 1.0935 – its highest close since mid-November. The fear index (VIX) has also moved significantly lower to 10.78, after having been at 16 ahead of the elections. With centrist Macron seen easily beating Eurosceptic Le Pen (betting odds give Macron a 89% chance of winning and polls put him at 61% of the vote) it seems markets are pricing the Dog Days Are Over for Europe – inspiration for today’s title by Florence and the Machine.
Moves overnight were more centred on the US. The S&P500 rose 0.6%, the Dow was up 1.1% and at 20,996 is within a hairsbreadth of its record closing high, while the NASDAQ breached the 6,000 level for the first time.
US Treasury yields rose 5.9bps to 2.33%. While yields did gap higher following the French election, today’s moves appear more related to expectations for Trump’s impending “broad principals” tax plan.
Trump – in his own words – is expected to have a “big announcement on Wednesday having to do with tax reform” and that the tax cuts will be “bigger I believe than any tax cut ever”. It is widely tipped that the “broad principals” will be for the corporate tax rate to be cut to 15% from 35% (note this figure is not a surprise having been widely cited previously). The key for markets will be how will such a tax cut be funded and what is the likelihood of the tax cut being passed by Congress.
If the overall tax cut adds to the deficit after the initial 10-year window then it cannot be passed by a simple majority. It is unclear whether other revenue measures such as a “border tax” would be proposed to make up for the revenue loss. It is reported House Speaker Paul Ryan asked the Joint Committee on Taxation to analyse the budget effects of a temporary cut in the corporate tax rate to 20% which would expire after three years. Costings being cited in the media suggest that would lower federal tax revenue by 1.8 trillion over a decade, while a cut to 15% would decrease revenue by 2.4 trillion.
Fed market pricing has lifted significantly since last week with a 65% chance of June rate hike (compared to 34% this time last week) and 1.5 rate hikes are priced for the rest of the year.
The US dollar has fallen 1.0% since the weekend and was down 0.2% overnight. The Euro was up 0.6%, while the Yen fell 1.2%. The Aussie fell 0.4% while the Kiwi was down 0.9% overnight. There is no clear catalyst for the weakness in the Kiwi.
Finally the Canadian dollar fell 0.5% following news the US placed tariffs on Canada’s soft lumber exports which are worth around US$6.4bn a year. The US found Canada had been improperly subsidising its exports and a tariff of around 20% will now generally apply – similar to the level applied in the 2001 dispute. Is this an opening gambit ahead of NAFTA renegotiation? Commerce Secretary Wilbur Ross stated “What we had tried to do was to clear the air and get this dispute out of the way before the big NAFTA talks went on.”. The Loonie appears vulnerable to any further trade measures.
All domestic focus will be on Q1 CPI released at 11.30am AEDT. NAB looks for a Headline CPI outcome of +0.7% q/q and 2.4% y/y, slightly higher than the market consensus of 0.6% q/q and 2.2% y/y. If this eventuates it would be the first time since September 2014 that headline inflation has been within the RBA’s target band.
The consensus for the core measures are 0.5% q/q (1.8-1.9% y/y up from 1.5-1.6% in Q4) – the same as NAB. For the RBA, a tick-up in the pace of headline inflation will be encouraging as it should increase confidence core inflation will return to target. However, the RBA is also concerned with the lack of improvement in the labour market with stronger wages growth important to sustain a durable return to the inflation target. NAB sees the RBA on hold in 2017 and 2018 with the RBA having little appetite to ease policy further given house prices and risks in household balance sheets.
Internationally focus will be on the US where Trump is expected to announce his tax policy. Focus will also be on the ability of Congress to avoid a government shutdown on April 28. The spending plan being negotiated would keep the government funded through to Sept 30 with the sticking point being funding for the border wall with Mexico. The Administration is sending mixed messages with tweets by Trump emphasising the border wall and comments by Trump’s Budget Director Mulvaney indicating an appetite to negotiate.
Otherwise it is quiet with Japan’s Activity Index and Canadian Retail Sales. Thursday is bigger with BoJ/ECB.
On global stock markets, the S&P 500 was +0.61%. Bond markets saw US 10-years +6.28bp to 2.33%. In commodities, Brent crude oil +0.91% to $52.07, gold-0.8% to $1,266, iron ore -0.7% to $66.07, steam coal -0.1% to $83.85, met.coal -3.5% to $260.50. AUD is at 0.7537 and the range since yesterday 5pm Sydney time is 0.7521 to 0.7556.
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