Cashflow still the biggest risk to business but concerns around profitability continue to rise.
Insight
There was nothing not to like about Friday’s US data deluge. Payrolls just beat expectations at 215k vs. 205k with trivial revisions.
There was nothing not to like about Friday’s US data deluge. Payrolls just beat expectations at 215k vs. 205k with trivial revisions, the unemployment rate ticked up to 5.0% from 4.9% only because the participation rate rose again, and the 0.3% rise in average earnings merely countered the 0.1% February fall to leave annual growth steady at 2.3% (after February was revised up from 2.2%). The manufacturing ISM beat expectations at 51.8 (51.0E) up from 49.5 and consistent with stronger regional PMIs, with new orders particularly strong (58.3 up from 51.5).
The data failed to provide more than momentary support for either the dollar or Treasury yields while US equities shrugged off a weaker open (after a bad morning for European stocks) to close 0.6% to 0.9% higher with the S&P 500 closing at a new year-to-date high. This puts us within 3% of the May 2015 record highs. The VIX dropped 0.85 to 13.1 so matching its mid-week lows.
In FX, dollar indices closed within 0.1% of Thursday’s closes. EUR/USD ended +0.1% at 1.1380 aided in part by a small upward revision to the final EZ manufacturing PMI. JPY was the strongest G10 currency Friday, USD/JPY -0.8% to Y111.69 following Friday’s very poor showing by Japanese stocks post a weak tankan and rallying only briefly after US payrolls before falling away again. GBP fared worse in G10, -0.93% to 1.4227 and after a small downside miss in the UK manufacturing PMI. It won’t be helped today by a weekend EU Referendum poll showing 43% for ‘leave’ and 39% ‘stay’.
AUD/USD finished +0.26% at 0.7677 vs. Friday’s local session high of 0.7701 (the offshore high was 0.7693 just before payrolls). NZD/USD closed little changed, -0.07% at 0.6904.
In US rates, yields spiked very briefly post-payrolls only to fully retrace. 2s were just 0.1bp higher at 0.724%, having jumped from 0.73% to 0.765% post-data. 10s were +0.1bp to 1.771%. On the week, 2s are down 14.7bps. Who’d have guessed that if they were given Friday’s numbers on Monday but not Janet Yellen’s Tuesday night speech?
In commodities, oil well by as much as $1.60 (WTI) after Saudi Arabia’s deputy crown prince told Bloomberg than any production freeze was contingent on Iran agreeing to the same – which we know isn’t going to happen. Russia’s energy minister expressed some surprise at the latest public Saudi position. Chances of any production freeze being agreed in Doha on 17 April look remote.
Sunday’s CoreLogic RP data preliminary auction clearance rates showed a city-weighted national average of 67.0%. Sydney cleared 70.9% of auctions (trend is around 70.0%) and Melbourne 68.0% (vs. trend also close to 70%).
While US influences have been the main driver of Australian markets of late, the focus returns to Australia this week, with retail sales today and the RBA meeting on Tuesday.
There’s particularly keen interest in what if anything the RBA has to say about the currency in Glenn Stevens’ post meeting statement on Tuesday, alongside what is universally expected to be an unchanged Cash Rate decision. Given the neutral tones describing the currency in the March post meeting statement (“The exchange rate has been adjusting to the evolving economic outlook”), we expect Tuesday’s statement to contain some low level currency concerns along the lines of a “a lower AUD would be helpful for the ongoing rebalancing of the economy”. Even so, we do not think the RBA is too concerned about the current level of the exchange rate given that it can be largely explained by higher commodity prices and a generally weaker US dollar driven by diminished expectations for Fed rate rises this year. The RBA will likely continue to hold the belief that the currency should head back down if and when the Fed resumes tightening. This was evident in Stevens’ recent comment that:
“Unless you think that the commodity price trend now is different and we are heading back to a world with considerably higher prices for an extended period, and you think the [US Fed] is never going to lift rates, it is not clear that that situation will warrant a much higher exchange rate than this”.
There is a smattering of international event risk this week, notably Tuesday’s US non-manufacturing ISM survey, Wednesday’s equivalent from China (the Caixin version), China March DX reserves and Wednesday’s minutes of the March FOMC meeting. On Friday, the past four Fed chairs – Volcker, Greenspan, Bernanke and Yellen – all make an appearance in New York. The views of only one of them matter, but we already know what they are. Coo.
On global stock markets, the S&P 500 was +0.60%. Bond markets saw US 10-years +0.18bp to 1.77%. On commodity markets, Brent crude oil -4.12% to $38.67, gold-1.0% to $1,222, iron ore +2.0% to $54.80. AUD is at 0.7669 and the range since Friday’s local close has been 0.7599 to 0.7693.
The 2016 Euromoney FX poll is now open for voting and may be accessed at www.euromoney.com/FX2016
For full analysis, download report:
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.