NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Nothing like starting the day with some good old Australian hip hop. Funkroar 2011 hit “it’s all good (very good)” nicely captures the key upbeat message from Fed Chair Yellen appearance before Congress alongside the better than expected US and EU economic data.
Higher German inflation looks to have been the trigger for an uplift in core global yields while the improvement in US Tax reform prospects, as the Senate prepares to vote on its Tax bill, has triggered a big rotation away from US IT shares into financial and telcos. Price action in currencies has been relatively muted although GBP is the outstanding outperformer and in commodities, oil prices are having a volatile session ahead of OPEC’s meeting later today.
So it all started in Europe and for a change the big price action was in bond yields rather than currencies. Economic confidence amongst businesses and consumers in the euro-area rose as expected, taking it to a 17-year high, but the big surprise came from Germany’s CPI figures with the preliminary reading for November printing at 1.8%yoy against expectations of a 0.2% rise to 1.7%. The data triggered a sell-off in bund yields with the 10y rate climbing from just under 0.36% to 0.39% and then settling at 0.385%. Half an hour later, the revised Q3 USD GDP data came in better than expected (3.3% vs 3.2% exp.) and later on pending home sales were much stronger than expected.
Although 10y UST yields were already rising ahead of the German CPI print, the move accelerated post the data and then consolidated after the US data releases. Fed Chair Yellen upbeat message (albeit not new) didn’t do any harm to the move. Yellen delivered a positive assessment to the economic outlook, noting that wage gains and inflation remain tame, but she forecast strengthening ahead, she then signalled that further gradual rises in the Fed funds rate should be expected, albeit data dependent, of course.
The net effect from the above has seen the UST yield curve bear steepened with 2y rates up 2bps to 1.768%, 10Y rates up 4.8bps to 2.377% and the 30y rate up 6.1bps to 2.82%. Notably 10y UST yields traded to an overnight high of 2.3935%, so the 2.40% mark remains a big barrier for a move higher in yield.
Despite the rise in EU bond yields, the euro is only slightly stronger against the USD, currently at 1.1858, after trading in an overnight range of 1.1818-1.1883.Indeed, GBP is the big outperformer boosted by the prospect of an extension deal, amid positive signs of a compromise on the Irish border ahead of a key meeting next week. After trading in a steady upward trend overnight the pair currently trades 1.3422, up 0.63% over the past 24hrs.
So in index terms the USD has had a mixed night. DXY is -0.04% weighed by GBP and EUR strength, but BBDX is +0.06% reflecting offsetting USD strength against other G10 pairs. AUD in particular continues to trade with a soft tone, the pair is down 0.22% over the past 24hrs, it currently trades at 0.7578, but it traded to an overnight low of 0.7552. AU-US rate differentials have continued to narrow, the 10y AU US spread is now at 14.5bps and with 10y UST knocking on the 2.40% mark, the rates differential story is likely to remain a downward force for the AUD. Similarly, this morning the 2y AU-US swap rate ( semi semi) trades below 10bps and looking at the chart it appears to be the first time since early 2001 it has trade that low (currently at 8.9bps).
NZD is around where it closed the local session at 0.6890, after meeting some resistance around 0.6930 overnight. The RBNZ’s Financial Stability Report had a fairly muted impact on the market, even though it surprised some by modestly easing LVR restrictions. It seemed like a sensible move to us, with house price inflation now moderate, softer credit growth and the banking system much better placed to handle a shock. We expect further relaxation of restrictions over the next year or two. Acting Governor Spencer indicated that macro prudential policy would be reviewed on a quarterly basis
Lastly and ahead of the OPEC meeting tonight, oil prices have had a volatile session, Brent briefly traded above the $64 mark, then it collapsed to $62.6 and now it appears to have settled just above the $63 mark. A compromise on the extension period for production cuts remains a hot topic, see more below.
It’s another busy day of data releases with Australia’s CAPEX report and building approvals along with China’s official manufacturing and non-manufacturing PMIs the highlights during our session. New Zealand building permits and Japan’s industrial production are also released this morning. Later in Europe, OPEC meets in Vienna to discuss extending production cuts, Germany releases its labour market figures and the EU CPI figures are also out. Then the US gets personal and income spending data along with PCE figures (all for October). Weekly jobless claims and the Chicago PMI are also due out. Fed Quarels and Kaplan are on speaking duties.
Our economists expect Australia’s Capex report to reveal an increase of 1% in Q3 after a similar 0.8% growth in Q2. As for the 2017-18 expectations, NAB looks for an upgrade from $101.8bn to $105bn. We would not be surprised to see some modest upgrade even for the Mining industry reflecting the combination of better industry conditions and maintenance capex spending now “catching up” to sustain production and physical assets.
The recent softness in China’s economic data appears to be a factor for the muted expectations on the November manufacturing PMI with the market looking for a small pullback to 51.4 from 51.6 in October. There are no expectation numbers for the non-manufacturing reading, but last month the index printed at 54.3, comfortably in expansionary mode.
The OPEC meeting in Vienna is expected to conclude with yet another extension to the current oil production cuts. However, what’s next? is the big question with Russia seemingly seeking a clear phase-out plan before committing to further cuts. A production cut announcement seems to be already in the price, but as usual with OPEC, the devil will be in the detail.
After the hurricane distortions, the October US personal income (0.3% exp. vs 0.4% prev.) and spending (0.3% vs 1% prev.) data should provide a cleaner update on the state of the US consumer and set the tone for expectations on Consumer activity in Q4. Meanwhile the PCE data will also be examined for signs of a bottoming trend. The 0.2% outcome expected by the market would help to reinforce this view.
On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +0.00bp to 2.38%. In commodities, Brent crude oil +0.00% to $63.37, gold-0.8% to $1,283, iron ore +0.2% to $67.92, steam coal +0.4% to $96.80, met. coal +0.0% to $191.15. AUD is at 0.7597 and the range since yesterday 5pm Sydney time is 0.7552 to 0.7608.
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