Below trend growth to continue
Unlike the rest of us who are now waiting to see what Janet Yellen delivers this time tomorrow, RBA Governor Governor Glenn Stevens has gone early, the AFR publishing its now traditional end-of-year interview with him overnight.
Unlike the rest of us who are now waiting to see what Janet Yellen delivers this time tomorrow, RBA Governor Governor Glenn Stevens has gone early, the AFR publishing its now traditional end-of-year interview with him overnight. Nothing earth-shattering here with no direct attempt to give markets a steer on where he thinks the currency should be. Stevens nevertheless makes clear that he believes that if the currency does need to adjust further to the falls in commodity prices, then it will. He also suggests that in the event of any material reduction in risk appetite, the AUD will not be regarded as a safe haven. Certainly history is on his side here, and our own expectation is that the steep fall in the prices of commodities that contribute most to Australia’s terms of trade, will be exerting fresh downward pressure on the AUD sooner rather than later.
Mr Stevens was still upbeat about the economy, noting that ‘at worse’ the unemployment rate has levelled off, and seems less worried about the failure to date of non-mining capex to take off. He suggests decent growth could be achieved without this. The AUD started falling soon after headlines related to the interview starting crossing the wires (from above to below 0.72) though this looks to have been more a function of a generally rising US dollar than Stevens’ remarks.
The main features of overnight markets have been a modest recovery in oil prices and which has carried many other commodities with it, accompanied (or led by) a firmer dollar that sees the narrow DXY index up by just over 0.5% and led by a failure of the EUR/USD rate to hold on the 1.10 handle (it currently sits back down at around 1.0920). Turmoil in high yield credit markets also looks to have taken something of a back seat overnight, with corporate bond spreads actually coming back in a touch.
Data wise, the highlight has been US November CPI, which printed a ‘low’ 0.2% (0.17%) to pull the annual rate up to 2.0% from 1.9%. Gains continue to be led by rising healthcare insurance premiums and to a lesser extent last month, higher rents. Energy price falls continue to depress headline inflation though this picked up to 0.5% from 0.4%. Though the data was in line with expectations, US bond yields extended their gains after the data, though a co-incident rise in oil prices looks to have been the more significant contributor.
In other data the Empire (NY State) manufacturing survey rose to a still weak -4.59 from -10.74 and the NAHB housing index slipped to 61 from 62, still strong but off recent highs. UK CPI came in flat for 0.1% y/y (0.1% above expectations) while the German ZEW survey saw the ‘current situation’ reading lift to 55.0 from 54.4 and expectations to 16.1 from 10.4 – both better than expected.
Elsewhere in currencies and as our BNZ colleagues note, the NZD continued its run of outperformance. It ground up to above 0.68 before meeting fierce resistance beyond that point and it eventually succumbed as the USD rally got underway. The NZD currently sits around 0.6770, just up on the previous NY close while the AUD/NZD cross made an earlier low of 1.0611, its lowest level since 3 Nov. The GDT dairy auction overnight was close enough to expectations. Our resident BNZ ‘milk whisperer’ expected a modest increase in pricing and that was delivered, with the average price rising by 1.9%.
If ever there was going to be a day of twiddling thumbs ahead of key event risk, surely today is the day. The FOMC pronouncement will come at 06:00AEDT Thursday, with Fed chair Yellen to commence a press conference half an hour later. Despite the recent emergence of stress in high yield credit markets and a downturn in global equity markets, we fully expect the FOMC to agree to the first (25 point) rise in rates since June 2006 (when they were raised to 5.25% from 5.0%. The rest, as they say, is history).
It is nigh on impossible to second guess market reaction to the announcement of a rate rise. In FX, we know speculative positioning has been running very long US dollars up until two weeks ago. But the clear out of short EUR positions following the ECB means the ‘long’ is probably nowhere near what it was. We acknowledge the risk that the US dollar may well fall not rise initially (and so AUD/USD higher), but if so suspect this will be used as an opportunity to re-enter long USD positions. This assumes that the Fed’s new ‘dot point’ forecasts, and/or the narrative surrounding any rate hike, is not even more ’dovish’ than already expected.
On the dot-points, our guess is that the median staff projections for the fed funds rate at the end of 2016 will be lowered from 1.375%to 1.125%, which assuming a 0.25-0.5% rate for the start of 2016, implies there further tightenings in 2016 (which happens to be NAB’s current forecast). To help while away the time, the RBA’s Guy Debelle speaks at 11:00 AEDT, on ‘Some effects of the new liquidity regime’. We also get skilled vacancy data. New Zealand has its Q3 current account data. Offshore UK unemployment, US housing starts and ind.prod. are due.
On global stock markets, the S&P 500 was +1.40%. Bond markets saw US 10-years +4.59bp to 2.27%. On commodity markets, Brent crude oil +2.43% to $38.84, gold-0.2% to $1,063, iron ore +0.8% to $39.36. AUD is at 0.7189 and the range was 0.7161 to 0.7283.
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• Markets Today: 16 December 2015 (PDF, 274KB)
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