February 21, 2019

Markets Today: Fed minutes, UK defections & Aussie jobs

Have the Fed clarified its position after an apparent U-turn at their last meeting?

Today’s podcast



  • FOMC Minutes validate Fed’s ‘patient’ approach but tightening bias not dead and buried; USD and UST yields higher
  • Labour Force Survey key for AUD and Aussie rates market today, following still-too-soft WPI yesterday
  • Eurozone ‘flash’ PMIs (France, Germany, pan-EZ) key offshore event risk tonight; lots of US data too (incl. Philly Fed, DGOs)

After being moribund for much of the past 24 hours, markets have displayed a somewhat stronger pulse in the hour or so following publication of the January FOMC meeting Minutes – meaning a US dollar some ¼% up on where it was pre-Minutes and US Treasury yields 1-2bps higher across the curve.  In justifying this reaction, my speed-reading BNZ colleague Jason Wong picks out this quote: “Many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as “patient” and might then use different statement language.” This can be read as implying that the Fed still retains a tightening bias of sorts, in which respect Fed Vice Chair Rich Clarida is just out saying that “I don’t think the Fed made a U-Turn” (In January).

Earlier in the text, the Fed notes that softness in both core and headline inflation provides reason for a ‘patient’ approach, in order to assess the impact of past rate rises, etc..  It also notes that some downside risks to the outlook had recently increased even though the economy at the time of the meeting was fairly characterised as showing a ‘strong labour market’ and inflation ‘near target’.

On the Fed’s balance sheet, the Minutes note that ‘almost all’ FOMC members wanted to halt the run-off later this year.

The generalised positive US dollar reaction to the Minutes means that two of the night’s best performing currencies – GBP and AUD – have seen their gains reduced, AUD/USD to 0.7169 as I wrote from 0.7183 and GBP/USD to 1.3058 from a high of 1.3109.

Strength in the latter followed news of further defections – from three Tory MPs as well as another Labour lawmaker – into their newly formed centrist parliamentary grouping, moves which on our read (not universally shared, we should add) are seen to further diminish the risk both of a March 29th ‘hard Brexit’ and a successful no-confidence motion being brought by Labour leader Jeremy Corbyn and hence early elections.  Incidentally, an opinion poll published overnight puts the Tories on 38%, Labour of 26% and the ‘Independence’ group (i.e. this week’s ‘splitters’) at 14%.

UK PM May and EU chief negotiator Juncker have just been out saying that the two reconfirmed their commitment to avoiding a hard border on the island of Ireland and that their talks covered the role alternative arrangements could play in replacing the backstop in the future.  Earlier in the night, reports were that whatever change in wording – or adjunct to the Withdrawal Agreement – is crafted, the EU wants Theresa May to go back and get it ratified before the whole of the EU would be asked to sign off on it. Still no mean feat. If May’s deal doesn’t get through Parliament soon, then the odds continue to favour her losing control of the process. Parliament is expected to take over in a likely scheduled vote from 27 February.

As for AUD, this fell by about 15 pips yesterday, with 3-year rate futures some 2.5 ticks higher, on the Q4 Wage Price Index which came in at  +0.5% (NAB, mkt: 0.6%, 0.6%P) with annual growth steady at 2.3% (2.3%E). Annual wage growth bottomed some time ago, but the pace of improvement has been slow and growth is well below the long-run average of 3.2%. In a statistical quirk, both public and private wages rose at a faster rate than the headline total, up 0.6% in Q4, where this reflects the ABS calculating growth using rounded wage data. Annual growth in private wages excluding bonuses continued to trend higher, reaching 2.3%, while growth including bonuses remained elevated at 2.8%. Today’s labour Force survey should be more influential on RBA thinking (see below).

45 minutes ahead of the NYSE close, US stocks are generally showing small gains (DJIA and S&P 500 both up 0.2%, NASDAQ flat). Materials are the standout S&P sector, +1.91%, with gold, copper and steel-related counters all showing strong gains (2.5-3.0%). In this respect  copper prices are up 1.4%,  steel rebar futures +1.7% iron ore futures and gold up just 50 cents but meaning it has held Monday’s $14 gains (when US stocks were closed, hence catch-up today). SPI futures are up 0.15%.

Coming up

  • NAB’s forecast for ABS employment growth is 10k this month, slightly weaker than the consensus market expectation of 15k growth. Growth of 10k will slow trend employment growth from 23k per month to a rate closer to 19k per month. This is consistent a moderation in the NAB Survey Employment Index and broadly flat SEEK Job Ads.  NAB’s Employment Proxy (the NEPy) suggests the pace of monthly employment growth was around 11,000 persons in January, slowing from the 22k growth witnessed in December.
  • NAB forecasts unchanged unemployment at 5% (mkt: 5%), but with the risk of an increase. Slower employment growth, below 18k per month, puts upward pressure on the unemployment rate, given unchanged participation.  Further, the regular sample rotation of households included in the Labour Force survey also points to higher unemployment, with the unemployment rate of the outgoing group of households 0.7ppt lower than the overall sample
  • Lots happening offshore this evening, with particularly keen interest in the ‘flash’ Eurozone PMIs for January. Market consensus is for French services to recover a bit from last months’ sharp fall sufficient to drive an improvement in the overall (composite) PMI to a still contractionary 48.9 from 48.2, For Germany, let’s see if the earlier reported pick up in car orders translates into a rise in the manufacturing PMI (expected 49.8 from 49.7) while for the pan-Eurozone composite reading, consensus is 51.1 from 51.0 last time.
  • The Eurozone also has the record of the January ECB meeting (what if any discussion on news TLTROs?) plus chief economist Peter Praet talking (twice) while the US has the Philly Fed survey, Durable Goods Orders, weekly jobless claims and the Markit version of February PMIs.

Market prices


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