Lacking fresh data or major events, it’s been a relatively subdued offshore trading session where with a couple of currency exceptions (see below) markets have partially – or more than fully – retraced some of the moves we saw in the aftermath of last Friday’s US employment report.  Thus equities are mostly lower (major US indices off around 0.5% and following similar weakness in Europe) and bond yields are smartly higher – 10 year US Treasuries +13bps to 2.278% and 10yr German Bunds +6bp.

The latter is despite a fresh rise in Greek yields (+20bps) amid reports of no substantive progress in the talks currently in train between Greece and her EU creditors.  Reuters reported at around 3.30pm London time that Greece had executed an order for the €750mn payment due to the IMF today, though this  looks to be coming out of cash otherwise designated to pay pensions and wages later this month.

The only two currencies worth mentioning in terms of overnight price action – aside from the ever volatile Norwegian Krone – are GBP and NZD.  The post-election rally in all things Sterling continued – with no reaction to the widely expected no-change (and so no statement) decision from the Bank of England.  NZD bears meanwhile continued to gorge on the now seemingly consensus expectation that the RBNZ will be cutting rates, starting as early as next month (not a view our BNZ colleagues are on side with).

NZD/USD, that was under pressure within minutes of yesterday’s Wellington open (and following an opening spike higher on Sunday’s China rate cut news), and continued to leak lower offshore, for a 24 hour loss only just shy of 2%.  Anyone fortunate enough to have been on the long side of GBP/NZD ahead of the first UK election ‘exit poll’ is currently some 4% to the good. If they were on it in front of RBNZ Assistant Governor McDermott’s 24 April speech, they are up 10%.  New Zealanders had best gird their loins in preparation for an invasion of British holidaymakers next summer.

Coming Up

The Australian budget is due to be delivered at 7:30pm AEST, with markets and presumably ratings agencies, looking for the “quality trajectory” back towards surplus that the Federal Treasurer spoke of when returning from meetings in the US with the IMF and ratings agencies last month. Overnight, an editorial comment from Fitch in The AFR suggests that there is no threat to the AAA rating in the next couple of years at least.

Businesses will also be hoping for a significantly less negative reaction from consumers than last year, when the budget had a significant effect on consumer confidence and the economy (and of course, much of it never passed).

While many of the details of the Budget have, as is now customary, been leaked to the media, the headline Budget deficit projections – for the current and future years – have not (though David Uren in The Australian is suggesting that the current year projection will be less than $40bn).  Market consensus expectations as of last Friday were for a forecast budget deficit in 2015-16 of similar magnitude to 2014-15 (both in the A$40-45bn range – around 2.5-2.75% of GDP).

On the ratings risk, NAB assesses it as unlikely that Australia would be downgraded in the next two years, but we give a greater possibility of a negative outlook being attached to the rating.  Looking at recent years it is worth noting that S&P normally issues its first view of Australia’s credit rating and the budget on budget night. So should either a negative outlook or credit review be initiated, this is likely to be signalled to markets tomorrow evening. The results of this action would likely be announced in July, once S&P has conducted its normal annual review of the rating.

Offshore, we’ll get the ‘JOLTS’ job openings series (a favourite of Dr Yellen – see Chart of the Day) and hear from SF Fed President John Williams.  His view on how last Friday’s employment report sits with his last stated Fed view – that July or perhaps still June was a possible start date for tightening – will be of particular interest.  Also due and of interest, is the US NFIB’s Small Business Optimism Survey, a key  forward looking indicator and which dipped from just above 100 to just above 95 in the first three months of 2015.

Overnight

On global stock markets, the S&P 500 was -0.50%. Bond markets saw US 10-years +13.56bp to 2.28%. On commodity markets, Brent crude oil -0.84% to $64.84, gold-0.5% to $1,183, iron ore  +2.6% to $63.02. AUD is at 0.789 and the range was 0.7876 to 0.7952.Indicative range today 0.7865 – 0.7920. (For more market prices, please see p.2 of the pdf).

 For full analysis, download report:

• Markets Today: 12 May 2015 (PDF, 319KB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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