A further slowing in growth
The major event overnight was the US FOMC meeting where rates were left on hold as expected. There were very few changes to the post meeting statement with the Fed playing a straight bat. Markets were somewhat disappointed with Treasury yields and the US dollar reversing earlier gains that had occurred following stronger than expected US economic data.
The strength in US economic data gives inspiration for today’s title by the Black Eyed Peas: Boom Boom Pow.
On the FOMC Statement itself, there were two tweaks of interest. The Fed seemingly upgraded its inflation outlook ever so slightly, noting that inflation “will rise to 2%” instead of last meeting’s “is expected”. The Fed also noted the recent improvement in consumer and business sentiment of late. Despite those tweaks, the market took it as slightly dovish and not providing any support to the Fed’s mooted 3 rate hikes for 2017. The OIS market now places the probability of a March rate hike at 35%, down from 42% just prior to the FOMC, and is currently pricing in 2.1 rate hikes for 2017.
US Treasuries reacted similarly to the Statement, falling 2bps immediately after and ending the day almost unchanged at 2.47%. It’s worth noting here that yields did actually reach 2.51% after stronger than expected US economic data. ADP Payrolls printed at 246k, well up on expectations of a 167k print and suggestive of upside risks to Friday’s Non-farm Payrolls (note a 200+ print for payrolls would be enough to drop the unemployment rate by 0.1 assuming a constant participation rate). The ISM Manufacturing index also continued its surge increasing to 56.0 – the highest level in 26 months. Under the hood of the ISM, the prices paid index rose to its highest level since May 2011 to be at 69.0.
Other major sovereign yields followed the moves in Treasuries pre FOMC, with German Bund yields up 3.2 bps to 0.47% and UK Gilts also up 3.2 bps to 1.45%. Euro periphery yields rose more than Bunds with French OATs up 4.9 bps and Italian BTPs up 5.1bps – it seems the French Presidential Elections and Italian worries are starting to weigh. Movements in Australian CGS followed moves in Treasuries the previous day, up 2.4 bps to 2.74% while Kiwi bond yields fell 1.2 bps following the mixed labour market data yesterday (more on that later).
In the FX space, US dollar strength overnight also reversed on the back of the FOMC with Bloomberg’s DXY ending unchanged – though note the US dollar was up almost 0.4% overnight.
On the currency leader board, the Pound was the outperformer, up 0.7% to 1.2669 following a strong UK Manufacturing PMI with the cost sub-index reaching its highest level since 1992!. That read plays into the view that the Bank of England is likely to slightly upgrade its inflation and growth forecasts tonight (see Coming up for details). Other currency pairs were unchanged to slightly lower with the Aussie unchanged, and the Euro, Yen and CAD down 0.2% each respectively. The Kiwi was the clear underperformer, down 0.4% following a mixed labour market report. The Kiwi unemployment rate rose to 5.2% from 4.9% but that was on the back of a surge in the participation rate with employment growth still strong. In Kiwi news, the NZ PM called the general election for 23 September.
Comments yesterday on currency manipulation by Trump’s adviser Peter Navarro sparked a flurry of responses across the Pacific and the Atlantic. Japan’s Cabinet Secretary said it was “absolutely not the case” while German Chancellor Merkel said they do not exercise any influence on the ECB. Donald Tusk who is President of the European Council said the US was a “worrying” source of unpredictability.
Equities were mixed. US equities were lower or unchanged with the S&P500 down 0.1%. With declines in Energy (-1.0%), Real Estate (-1.1%) and Utilities (-1.6%) weighing. European equities were stronger with the EuroStoxx up 0.9% on the back of strong earnings from Siemens and Volvo.
In commodities, oil was up 1.7-2.0% with WTI at $53.72 and Brent at 56.67. Thermal Coal fell 0.4% to $82.7 along with Coking Coal which was down 1.3% to $168.0.
Focus today domestically is on the Trade Balance and Building Approvals. For the Trade Balance, another monthly improvement is likely with the consensus looking for a $2bn surplus. NAB is on the high side in expecting a $3bn surplus, which if it eventuates would make it Australia’s largest ever monthly trade surplus. There are good reasons to expect a bumper outcome given soaring iron ore and coal loadings at key ports in December, along with the recent moves in commodity prices. With coking coal prices remaining at high levels, it is likely Australia will continue to record trade surpluses for at least the first half of 2017.
For Building Approvals the market is looking for some payback after last month’s 7% increase and is looking for a decline of 1.5%.
Internationally it is a quiet. The Bank of England meets and releases its latest Inflation Report as well. It is expected that inflation and growth forecasts for the UK could be upgraded slightly, but this is unlikely to precipitate any change in the outlook given Brexit is yet to come. Corporate earnings seasons continues with Deutsche Bank, Amazon, and Shell reporting amongst others. In terms of other data flow, the US has Weekly Jobless Claims and Unit Labour Costs.
On global stock markets, the S&P 500 was -0.14%. Bond markets saw US 10-years +3.16bp to 2.47%. In commodities, Brent crude oil +1.96% to $56.67, gold+0.2% to $1,211, iron ore +0.0% to $83.34, steam coal -0.4% to $82.70, met.coal -1.3% to $168.00. AUD is at 0.7587 and the range since yesterday 5pm Sydney time is 0.7552 to 0.7597.
For full analysis, download report or listen to The Morning Call Podcast
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.