A further slowing in growth
Something of a return to the good old days in the last 24 hours, when an infolding economic calendar and rhetoric from Fed officials counted for more than what the leader of the free world had to say.
So it was that New York Fed president Bill Dudley – considered to be one three most important Fed officials after Janet Yellen and Stanley Fisher – electrified markets first thing yesterday with his comments that the case for Fed tightening had become “a lot more compelling in recent months” and that “…the risks to the outlook are now starting to tilt to the upside”. These came hot on the heels of remarks from San Francisco Fed president John Williams that he saw a March hike getting “serious consideration”.
The net effect was to see market-implied probabilities for a March rate hike shift from near 50% at the start of the week to more like 80% now. It is evidently now going to take a very disappointing US payrolls report on March 10th – in particular evidence that earnings growth is not after all starting to pick up – to knock the market off the scent of a move on March 15th (incidentally the same day that the US government is expected to bump up against the debt ceiling, that was temporarily lifted with bipartisan support in front for the US elections). This will also be the week where the US administration is indicating it will provide at least an outline, rather than a blueprint, of its budget proposals about which President Trump provided very little detail yesterday such that market reaction was extremely limited.
Looking across markets, what is particularly noteworthy is that US stocks have powered ahead (the Dow above 21,000 for the first time) seemingly unperturbed by the sharply rising risk of a March hike (and which were it to occur would surely also have markets now believing that the Fed can and will deliver a total of three hikes this year). This tells as that Fed tightening in the face of unambiguous economic strength is not something to be feared.
In this regard, last night’s manufacturing ISM report was gratifying, coming in ahead of expectations at 57.7 up from 56.0 in January and with the new orders sub-series leaping to 65.1 from 60.4. At the same time, the Fed’s preferred PCE deflator inflation measure remained sedate in January, unchanged at 1.7% and something that the likes of Fed dove Neil Kashkari will use to support his claim the Fed should be in no rush to tighten. The Fed’s Beige Book just released shows most districts reporting activity to be expanding at a ‘modest to moderate’ pace.
In the Eurozone, where the PMI story is also one of building economic strength, the higher than expected German CPI print at 2.2% up from .1.9% has provided a measure of support for the Euro against a stronger US dollar backdrop. In contrast, a weaker than expected UK manufacturing PMI (54.6 from 55.7 and 55.8 expected) has taken a bite out of Sterling.
For the AUD, it’s a very familiar scene to come in and see AUD/USD sitting comfortably between 0.7650 and 0.7700. Yesterday’s Fed-inspired rally in the US dollar is largely offset by a positive reaction to yesterday’s better than expected Q4 GDP figures. This leaves the AUD as by far the best performing G10 currency of the last 24 hours.
Finally, the Bank of Canada met last night against the backdrop of a big upside CPI surprise last Friday, but in leaving rates unchanged continued to point to persistent economic slack and ‘significant uncertainties’ weighing in the country’s outlook.
Following on from yesterday’s better than expected GDP report, today sees January’s Trade Balance and Building Approvals. NAB is expecting to see a further enlargement of the monthly trade surplus from $3.5 billion in December to $3.6 billion. Bulk commodity exports are expected to feature with increases in coal, iron ore, and a further uplift in LNG exports as the production ramp-up from the projects that started operation last year continues. Gold exports could well be lower given Newcrest’s reported flooding affecting production at Telfer. Supporting export receipts, the RBA Commodity Price index in January continued rising, up another 4.1% in Australian dollar terms.
On Building Approvals, surveys points to a diminishing pipeline of prospective apartment construction. The AiG PCI Construction of New Orders index points to a small decline in January, a hint that the appetite for new apartment development may have eased back a little further in January. NAB looks for a decline of 2.7% in aggregate Residential Building Approvals after the 1.2% decline in December, centred more likely on apartments.
Internationally and ahead of speeches both from Fed chair Janet Yellen and vice-chair Stanley Fischer tomorrow night, the Fed speaking rostrum is this morning occupied by Lael Brainard who speaks at 10:00 AEDT at Harvard university. We doubt she’ll pull the market off the scent of a March rate rise even though she has in the past been very vocal about the risks to the US economy from US dollar strength and its effect in tightening financial conditions. Those concerns should be less evident given the dollar’s performance so far this year. Data wise, we get just weekly US jobless claims, Canada’s Q4 GDP and EC employment/unemployment.
On global stock markets, the S&P 500 was +1.55%. Bond markets saw US 10-years +2.86bp to 2.46%. In commodities, Brent crude oil -0.18% to $56.41, gold-0.3% to $1,250, iron ore -0.0% to $91.26, steam coal -0.8% to $82.75, met.coal +0.3% to $166.00. AUD is at 0.768 and the range since yesterday 5pm Sydney time is 0.7637 to 0.7700.
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