May 2, 2017

Markets Today: The inflation song

It’s been a rather listless overnight session, US data has been on the disappointing side, US equities have been headed sideways, the USD did not build further on yesterday’s gains at the start to the week, while oil continues its march lower.

Despite all that, the US Treasury curve is a little higher and a tad steeper. (There’s more on that below.)   The VIX index has eased further and has been trading below 10 intra-day in the US.  (It was a holiday in much of Europe for the May 1 Labour Day; China too yesterday.)

Outperformers in the FX market have been the AUD and NZD, the Mexican Peso also stronger, funding for the “wall” not included in the funding bill to keep the US government functioning though September 30.

Not helping the tone of US equity markets was a report from President Trump that he’s considering breaking up big banks.  Even so, intra-session lows in bank stocks seems to have been unwound, statements one thing, getting it into passed law another.

Yesterday’s announcement in Asia time that Congressional Republicans and Democrats had agreed on a $1.1t omnibus spending package to fund the government through Sep 30 had initially provided the initial bid tone to the US$, the US averting a government shutdown.  But this did not carry on further through the overnight session. US data was on the disappointing side of expectations and the Citi Economic Surprise Index has headed back into negative territory for the first time since last November.

US nominal personal income and spending in March missed the consensus by 0.1-0.2 percentage points, with downward revisions also released.  The US ISM Manufacturing index also missed consensus but remains at a solid level. The downward surprise in last week’s CPI carried through into the headline and core PCE deflators, confirmed by the y/y rate in the core PCE deflator down to a 12 month low of 1.6% from 1.8% in February, emphasising the continued low inflation story and late inflation mail ahead of Thursday morning’s expected no change from the FOMC.

That y/y rate was in line with expectations, supporting Treasuries, the rub coming when US Treasury Secretary Mnuchin saying that issuing ultra-long bonds “absolutely” makes sense.  Though such a comment might not be all that surprising given the curve, it might have been enough to sees traders pull back after what’s been a strong rally, the US 10 year Treasury yield having rallied from 2.6% to 2.3%.  It sits a little above that level this morning.  The US ISM Manufacturing index came in at 54.8 from 57.2 (E: 56.5), with some easing in new orders and the employment components ahead of Friday’s jobs report.

While the USD was languid, there has been carryover from yesterday with a still soft GBP after the Europeans made it clear that the divorce would have to be settled before the likes of trade deals could be negotiated.

With volatility ebbing even lower, the AUD and NZD have been the outperformers overnight.  The AUD sits this morning back above 0.75, having traded up toward the figure during late Asia trade.  It sits at 0.7526 in early trade, the NZD at just above 0.69.  With China out yesterday, there’s no update on iron ore.  Elsewhere on the commodity front overnight, NY copper was up 2.11%, but oil was lower, WTI down $0.58 to $48.74 in the wake of a further lift in US rig counts and US production up to $9.27mb as the OPEC May 25 meeting approaches amid softening prices.

Coming Up

The BoJ and the RBA are in focus today with BoJ Minutes and a speech from Governor Kuroda this morning and the RBA Board Statement this afternoon.  As for the BoJ, they’ve recently downgraded their medium term inflation forecasts slightly (at the lower end of their expected ranges).  The market expects that the BoJ will maintain its very accommodative monetary policy stance for a long time yet.

There’s currently no monetary policy bias built into the RBA futures curve for this year, with less than 2 bps of easing “priced in” by December, an understandable less than 10% chance of a cut.  Last week’s CPI revealed somewhat higher than expected headline and underlying inflation, but the emphasis on “somewhat”.  And so if there’s any recognition that last week’s CPI might have done anything more than a tweak to the starting point, that could be material if it lessens the (slim) chances of any more easing.  The full forecasts are released in Friday’s quarterly Statement.  We don’t look for big changes.  Governor Lowe might comment in his speech tomorrow.

Elsewhere today is the Caixin Manufacturing PMI (L: 51.7; E: 51.3; the official reading softened more than expected to 51.2 from 51.8).

Tonight sees the final estimates of the Eurozone Manufacturing PMIs (with Europe coming back on line after the May Day holiday).  The US released Auto Sales.  For Kiwi watchers, there’s the fortnightly dairy auction with a neutral result expected by our BNZ research brethren after the previous +3.7% outcome.


On global stock markets, the S&P 500 was +0.17%. Bond markets saw US 10-years +3.78bp to 2.32%. In commodities, Brent crude oil -1.21% to $51.42, gold-0.9% to $1,257. AUD is at 0.7525 and the range since yesterday 5pm Sydney time is 0.7462 to 0.754.

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