Below trend growth to continue
My colleague Rodrigo Catril warned yesterday of the possibility of a US Fed March rate hike – what he termed the Ides of March. That argument gained further currency overnight with the US CPI and core‑Retail Sales printing double the market consensus.
That has seen the OIS market lift pricing for a March rate hike to 48% from 37% a couple of days ago. Movements in other markets were more muted then what your scribe would have expected – perhaps suggestive that recent political events (Russian links to Trump’s election team and the resignation of Mike Flynn as National Security Adviser) may be weighing. Nevertheless, it seems a March rate hike is a distinct possibility, inspiration for today’s title courtesy of Ellie Goulding Why I got you on my mind.
First to the data. Economic data was very strong with Headline CPI for January printing double the market consensus at 0.6% m/m which takes the annual rate to 2.5% y/y. Some of that stellar increase reflects petrol prices, but even when excluding that, the core measure also rose strongly up 0.3% m/m to be 2.3% higher y/y. While the Fed targets the PCE measure, a general rule of thumb is that the CPI gives a good indication of the PCE which usually translates to the CPI less 0.5% points. That means with annual core inflation at 2.3%, core PCE is likely to be at 1.8% y/y and very close to the Fed’s 2% target, while the headline measure is likely to be already there.
US Retail Sales were also strong, with Sales Ex-Autos up 0.8%, double the consensus of 0.4%. However, that does come on the back of a weak December, so averaging the two months is suggestive of solid consumer spending rather than an acceleration. The manufacturing sector also continued its strength with the Empire State rising to 18.7 from 6.5 and well above consensus of 7.0. The rise in the Empire is also suggestive of another strong ISM Manufacturing number for February.
US Treasury yields were higher on the back of the strong data, with yields up 3.4 bps to 2.50%. The inflation component almost entirely drove the increase with breakeven inflation rates up 3.5 bps. Other major sovereign bond yields were also higher with German Bund yields up 0.70bps to 0.37% while UK Gilts yields fell 1.3bps to 1.30% on the back of a mixed labour market report (while employment was strong, wage growth was below expectations). Australian CGS rose 5.1 bps reflecting the moves in Treasuries the previous day.
The US dollar did rise on the news, being up almost 0.5% before reversing to end the day broadly unchanged. There does not appear to be a clear catalyst for the reversal. The Kiwi, Norwegian Krone and the Aussie all outperformed overnight, up 0.6%, 0.6%, and 0.5% respectively. The Aussie broke up through the $US0.77 barrier this morning and is currently sitting at $US0.7703. The Aussie labour market data could provide the catalyst for a firmer footing at 77 with NAB seeing upside risk (more on that later).
Yellen’s testimony before Congress mostly reiterated the points made yesterday to the Senate. The Fed Chair did note the improvement in Business and Consumer Confidence was real and her comments on the US economy generally provided support to the equity market. Equities were higher across the board with the S&P500 up 0.4% and at a new record high. European equities were also stronger with the EuroStoxx and FTSE up 0.5% each.
There were also a number of Fed speakers overnight, but these had little market impact. Of interest was the Fed’s Rosengren (non-voter and recent hawk) who indicated that more than three rate hikes was possible for 2017, stating “likely be appropriate to raise short-term interest rates at least as quickly as suggested by the Fed’s current…median forecast, and possibly even a bit more rapidly”.
Political events also developed overnight with further commentary in the press on Trump’s pre-election teams links with Russia. Nevertheless it appears to your scribe that Trump is starting to tone down is rhetoric with Japan’s PM Abe inferring that Trump backed away on his comments of the Japanese manipulating their currency stating “Trump shared the view that our monetary policy is not for currency manipulation but for ending deflation.
Finally, while the US is clearly set to raise rates this year, Sweden’s Riskbank is unlikely to follow with the Bank sticking to its dovish tone.
The focus today will be on Aussie Employment and Unemployment data at 11.30am AEDT. The market consensus is for employment growth of +10k and an unchanged unemployment rate at 5.8%. NAB sees possible upside risks to employment this month following the recent pick-up in a number of indicators and is expecting employment growth of +20k. That growth rate is consistent with the NAB survey with the employment index out of the survey suggestive of employment growth averaging around 21k a month for the next three months or so. It’s also worth noting here that employment has generally undershot leading indicators for the past six months and some catc6 up could be expected over the next few months – though of course picking the right month has proven to be bit of a lottery in the past.
The RBA’s Ellis, who acts as the RBA’s chief economist, also makes remarks to a housing research conference which is unlikely to yield anything new in terms of the outlook given last week’s Statement on Monetary Policy and a recent speech by Governor Lowe. Coincidently, Dr Ellis’ former boss ex-Governor Glenn Stevens was appointed yesterday to advise the NSW state government on housing affordability issues.
Internationally it’s a very quiet day ahead. Bank of Japan Governor Kuroda speaks in Tokyo, while economic data is mostly second-tier with US Construction Starts, US Weekly Jobless Claims, and the Phili Fed Manufacturing Index. Finally, G20 foreign ministers meet for a two-day meeting in Germany so headlines around trade or geopolitics are always possible.
On global stock markets, the S&P 500 was +0.40%. Bond markets saw US 10-years +3.96bp to 2.50%. In commodities, Brent crude oil -0.41% to $55.74, gold+0.6% to $1,231, iron ore -0.7% to $91.05, steam coal +0.1% to $80.00, met.coal +0.0% to $161.50. AUD is at 0.7699 and the range since yesterday 5pm Sydney time is 0.7637 to 0.7709.
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.