May 27, 2016

Markets Today: I’ve Gotta Get a Message to You

A quiet night overnight with US Treasury yields moving 3.5bps lower to 1.8%, alongside weaker than expected core durable goods and capex orders.

At the risk of making it Bee Gees Friday again, this 1968 classic (I’ve Gotta Get a Message to You) feels oddly appropriate with Fed speakers recently seemingly feeling a need to get a message to the market about the likelihood of rate hikes. Today we get the Fed Chair herself (see coming up for more details).

A quiet night overnight with US Treasury yields moving 3.5bps lower to 1.8%, alongside weaker than expected core durable goods and capex orders, while another strong bond auction may have provided some support. What appeared to be slightly dovish remarks by the Fed’s Powell may have also contributed.

Weaker US capex orders served as a reminder that the investment data still looks sluggish in the US (a story also very familiar in Australia given our Capex survey yesterday) with core capex orders declining 0.8% m/m, below the +0.3% expectation. However, all is not woe with the Atlanta Fed’s GDPnow pencilling in Q2 GDP at 2.9%. US weekly Jobless Claims were also positive at +268k, slightly better than the market consensus of 275k and continuing to tick back to their recent trend.

Overnight the US Fed’s Powell hit the wires. While Fed voter Powell was casting his lot behind a rate hike soon: “Depending on the incoming data and the evolving risks, another rate increase may be appropriate fairly soon” he also sounded a little dovish stating “but don’t want to hurry” and that the UK’s EU membership referendum “presents reason for caution in raising rates”.  In NAB’s view the Brexit vote coming one week after the June FOMC meeting probably tips the likelihood of a rate hike to the July meeting and the market is currently pricing around a 65% chance the Fed raises rates by July. Rather strangely Powell also cast some doubt on the apparent co-ordination between Fed officials for the June/July hike stating that there was “no concerted effort to signal [a] Fed hike”.

The other story overnight was that oil briefly breached the US$50.00 a barrel a mark for both WTI and Brent measures. The move higher in the oil price was driven by a greater than expected drop in US oil inventories by 4.2m barrels while global oil production has also been affected by disruptions in Nigeria and Venezuela.

While oil is technically lower overnight (Brent down 0.5% to $49.47) the recent moves higher have driven a rally in commodity linked currencies with the Norwegian Krone up 1% the CAD  up 0.4%, and the Aussie also 0.3% higher. The Aussie also seemed unperturbed by the 1.8% move lower in the iron ore price to US$49 a tonne.  Overnight there was also broad US dollar weakness which saw most currency pairs move higher with the Euro up 0.3% and Yen up 0.4%. One of the laggards was the Kiwi which fell sharply yesterday following the lower Fonterra forecast milk price of $4.25 per kg/milk, but is now broadly unchanged overnight.

Against that background, equity markets were fairly quiet last night with the S&P500 unchanged and the Euro Stoxx increasing 0.3%.

Coming Up

There is nothing of note on the Australian Calender apart from the RBA’s Guy Debelle participating in a panel on the new BIS Global FX Code of Conduct at 8.30am AEST Today  in NY. It’s unlikely that he would be willing to discuss Australian issues at such a forum and we don’t expect the panel discussion to be particularly market moving.

Internationally the data focus will be on Japan with monthly CPI reads. The market is expecting a 0.7% y/y increase for the national core measure for April. Outside of Japan not a whole lot of significance, with Industrial Profits in China.

In the US we get the second reading on US Q1 GDP where markets are expecting a 0.9% q/q increase, an upgrade from the first estimate of 0.5%. We also get the final measure of the Uni Michigan Consumer Sentiment, which also importantly includes inflation expectations.  Friday’s trade may also be holiday affected given Monday’s Memorial Day holiday.

The inexhaustible line of Fed speakers continues and today we get the Fed Chair herself. The event is marketed as Yellen being eulogised on her ‘groundbreaking achievements’ and at the event she will be receive the Radcliffe Medal at Harvard University. The event includes a panel session with a number of academics and reflections from former Fed Chair Ben Bernanke. It is unclear whether Yellen would use such a forum to discuss the outlook for US rates, in which case we may have to wait until next week for her views.


On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years -3.48bp to 1.83%. In commodities, Brent crude oil -0.54% to $49.47, gold-0.3% to $1,221, iron ore -1.8% to $49.48. AUD is at 0.7218and the range since yesterday 5pm Sydney time is 0.7192 to 0.7242.

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