Below trend growth to continue
In 1968 John Lennon wrote this Beatles song after three weeks of meditation with Indian Gurus, equity markets have been on a tear for four days and now in a similar way they are also showing signs of fatigue.
In 1968 John Lennon wrote this Beatles song after three weeks of meditation with Indian Gurus, equity markets have been on a tear for four days and now in a similar way they are also showing signs of fatigue. After making new record highs yesterday, the S&P and DJ have struggled to make new gains while in Europe the EurStoxx index closed in in negative territory (-0.25%) for the first time in five days. GBP and commodity linked currencies have given back some of their previous day’s gains, core global yields have edged a little lower and oil prices have essentially given back all the gains from the previous day.
In recent days risk sentiment has been buoyed by the expectation of further stimulus and the lack of new news overnight appears to have taken the wind out the market’s sails. Expectations of stimulus need to be backed up with some action and now the risk of disappointment is starting to rise. For one, BoE easing tonight is not a given (see more below) and there is still no clarity on the size, type and timing of fiscal and monetary stimulus in Japan. Adding to the uncertainty, US corporate earnings season starts in earnest tonight with JP Morgan Chase kicking off the bank sector reports.
Looking at currencies the SEK and CAD are sitting at the top of the G10 leader board, up 0.72% and 0.56% respectively. The CAD’s performance was boosted by the BoC upbeat assessment on the outlook for the Canadian economy (BoC was unchanged as widely expected), despite the fact that oil prices dropped just over 3% overnight. The AUD and NZD are little bit lower (-0.21% and -0.34% respectively) with both currencies struggling to make new highs. After reaching an overnight high of 0.7638, the AUD is now at 0.7607. Meanwhile the NZD continues to meet resistance above 0.73c. The kiwi traded to an overnight high of 0.7325, but now is back below the 73 mark and currently trading at 0.7274.USD/JPY has managed to stay with a 104 handle despite comments from some government adviser Hamada that ‘helicopter money’ was a very “risky gamble”.
Lastly GBP is at the bottom of the leader board (-0.69%) with the pound coming under pressure in the last few hours following Theresa May’s announcement of a very anti-EU/Eurosceptic UK Government, effectively dashing any hopes of a parliament referendum overrule.
It has been a busy week for Fed speakers and this morning we have another Fed speaker kicking off events for the day. At 8:00am (AEST) Fed Harker speaks in Philadelphia and at the same time in New Zealand job advertisements for June are scheduled for release. NZ Manufacturing PMI and RICS house prices (both for June) follow shortly thereafter.
In Australia this morning and ahead of the all-important labour force report we get the monthly inflation expectations (Jul) and this afternoon RBA Ellis speaks on a panel in Sydney.
As for the June labour force report, our economists expect a below consensus employment print on the back of sample rotation impact. Employment growth is seen at -17k m/m vs consensus of +10k m/m while the unemployment rate is expected to tick higher to 5.8% from 5.7%, in line with consensus. The major factor for our below consensus forecast for employment growth is based on our expectations of a negative impact from sample rotation, potentially as much as -30k jobs per month over the next two months.
The market is currently 56% priced for a 25bp cut in August and is fully priced for a 1.50% cash rate by November. We suspect a strong labour report is unlikely to have a material impact on current rate expectations. In contrast, there is ample scope for more RBA easing to be priced in on the back of a soft report. As for the AUD/USD, the recent uplift in risk sentiment has kept the currency pair well supported however it is notable that it has struggle to maintain a level above 76c mark, suggesting further gains may be harder to come by. As such we think the AUD/USD is probably more vulnerable to a soft labour force report while the uplift from a strong report is probably going to be limited. All that said, the Q2 CPI print due for release 27 July remains the big swing factor for the August RBA decision.
In Europe the focus will be on the BoE meeting with market currently pricing an 83% chance of a 25bps rate cut. The meeting is very much “live” with some noting the possibility of QE expansion while others have argued that the BoE may prefer to wait for its next meeting (4 Aug) when more data will be available to assess the impact from the Brexit vote.
Finally in the US we get the usual weekly jobless claims along with PPI figures for June. Fed Lockhart, George and Kaplan are all on the speaker roster today.
On global stock markets, the S&P 500 was +0.01%. Bond markets saw US 10-years -3.57bp to 1.47%. In commodities, Brent crude oil -3.26% to $46.62, gold+0.7% to $1,343, iron ore -0.4% to $59.15. AUD is at 0.7607 and the range since yesterday 5pm Sydney time is 0.7583 to 0.7637.
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