Below trend growth to continue
Local market’s finished up on Tuesday in a distinctly ‘risk-off’ frame of mind, and that sentiment has extended throughout the European and US sessions
Local market’s finished up on Tuesday in a distinctly ‘risk-off’ frame of mind, and that sentiment has extended throughout the European and US sessions. US stocks have just closed with indices averaging losses of 1%, Treasury yields are back at their lowest levels in over a month and 10yr Bunds have dipped back below 10bp (0.098%) for the first time since 20 April 2014 when they hit their record low of 0.074%. European stocks again underperformed the US, the Eurostoxx 50 down 2.43%.
There is no obvious catalyst for the sell-off, rather we’d gauge that stock investors are retreating back into their shells ahead of the US first quarter earnings seasons that kicks off in earnest next Monday (Alcoa) and where the consensus is for earnings of S&P500 companies to be on average 7.6% lower than the same quarter of 2015.
In currencies USD/JPY has traded back below ¥110 for the first time since 31 October 2014. This was the day, recall, when the BoJ surprised markets by raising the quantum of its QQE programme from ¥Y70tn to ¥80tn and which proved to be the inspiration for the run up to above ¥120. The pressure is now on for them to do something similar on 28 April, amid deepening scepticism that they can succeed and bearing in mind that EUR/USD is currently trading some 4% stronger than the day before the ECB launched its cocktail of additional easing measures on 10 March.
BoJ Governor Kuroda hinted at more easing to come in parliamentary comments yesterday, but he made no impression on markets in doing so. Neither – more than momentarily – did Chief Cabinet Secretary Suga who told the press he was watching FX level movements with a ‘sense of urgency’.
Market moves have come largely despite not because of incomings economic data, though downward revisions to Eurozone PMIs relative to the ‘flash’ estimates did resonate somewhat in Europe. The non-manufacturing ISM report didn’t show quite the uplift of its manufacturing sector brethren from last Friday, but at 54.2 (up from 53.4) it just exceeded expectations. The JOLTs (job openings) report was a little softer than expected but remains an extremely elevated levels, while the ‘quit rate’ – beloved by Janet Yellen – rose to 2.1% from 2.0%. Against this, a wider than expected January trade deficit – in real as well as nominal terms – has the Atlanta Fed downgrading its “GDPNow’ estimate of first quarter growth to 0.4% from 0.7% last Friday.
AUD/USD is the worst performing G10 currency of the past 24 hours followed by GBP and where Brexit concerns do appear to be moving back to the fore (alongside expectations for a soft Q1 UK GD outcome following latest PMI data).
The RBA’s low level expression of concern about the currency in yesterday’s post meeting statement (that “an appreciating exchange rate could complicate the adjustment under way in the economy”) produced a small bounce in AUD/USD, from around 0.7575 to 0.7625. But the market’s sense of their emphasis on upcoming inflation data to help the RBA gauge the outlook for inflation was seen to imply a somewhat greater willingness to cut rates in response to low inflation than previously. This quickly took AUD back down. A jump back higher in the VIX has done the rest (o/n low of 0.7510).
AUD/NZD meanwhile has dropped back below 1.11 after the last Global Dairy Trade auction produced an average winning price up 2.1% on last time and while there was no formal poll the result looked to be a touch better than the whisper numbers heading into the auction.
March FOMC meeting minutes are the main draw in the coming 24-hours. Risk is that they don’t come across as dovishly as the post-meeting statement or Fed chair Yellen’s subsequent speech, in so far as they should reflect the spectrum of views presented to the meeting and which as we’ve learned from several FOMC members’ subsequent remarks, don’t quite reflect the chair’s interpretation of gradualism.
Ahead of the minutes, we get China’s Caixin service sector PMI today (11:45 AEDT) and which was last at 51.2 (the official version, recall, improved to 53.8 from 52.7 when published last Friday).
We also have a speech from RBA assistant governor Chris Kent – on Economic Forecasting at the RBA – but not until 17:40 AEDT.
On global stock markets, the S&P 500 was -1.00%. Bond markets saw US 10-years -4.35bp to 1.72%. On commodity markets, Brent crude oil +0.66% to $37.94, gold+1.1% to $1,231, iron ore -0.1% to $54.75. AUD is at 0.7536 and the range was 0.751 to 0.7632.
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