Below trend growth to continue
Yesterday’s USD resurgence accompanied by an improvement in risk appetite and hopes of progress on US tax reform came to an abrupt end courtesy of President Trump threat of a government shutdown, if funding isn’t included for the border wall promised in his campaign.
The souring in sentiment has seen US and European equities end the session lower while US Treasuries rallied. The Euro is stronger boosted by solid PMI releases and oil prices are also higher on news that US crude inventories went down for the eight week in a row. Meanwhile if Fed Chair Yellen is a fan of Johnny Cash she is probably singing “We’ve been talkin’ ’bout Jackson, ever since the fire went out, I’m goin’ to Jackson, I’m gonna mess around, Yeah, I’m goin’ to Jackson, look out Jackson town”.
True to form, President Trump’s address in Phoenix unwound all the positive feeling that had been built around the prospect of a swift debt ceiling resolution and US tax reform. The US president threatened to take the US government to the brink of a shutdown, if needed, to pressure Congress into funding the border wall that was a centerpiece of his 2016 campaign. He also said that he may end the North American Free-Trade Agreement.
The USD was the first to react with USD/JPY heading sounds as the news broke. Then, in the overnight session the souring mood spread to the equity market with main European and US equity indices ending the day down between -0.30 and 0.50%. US bond yields traded sideways in Asia and at the start of the European session, but then as the US opened a rallied ensued with 10y UST falling from an overnight high of 2.22% to 2.166% where they currently sit.
The USD is softer against most currencies with JPY (and European currencies top of the leader board (+/-0.50%). NZD has been the underperformer, down 0.67% and the rise in oil prices has helped CAD perform (+0.12%), despite initial losses following Trump’s threat to end NAFTA.
The Euro is back trading above the 1.18 mark, boosted by a positive round of European PMIs. The German manufacturing PMI printed at an impressive 59.4 and against expectations of a small fall. Meanwhile, the Eurozone manufacturing PMI came in at 55.8 this month from 55.7 in July. The data also helped the EUR/GBP cross make a break above the 0.92 mark, barring a brief stint in July, the last time the cross traded above 0.92 was back in April 2009. Positive economic news in Europe as well as the prospect of ECB tapering has boosted the euro, while sluggish economic readings and Brexit as well as political uncertainty are weighing on the pound. This picture is unlike to change any time soon.
At a first glance NZD underperformance could be linked to the government Pre-election Economic and Fiscal Update which showed surpluses slightly lower in the outer years. While it is true the move lower in NZD started around the time the report was released, fiscal reports rarely elicit a market reaction. Instead our sense is that NZD weakness is probably linked to the unwinding of extremely net long speculative positions.
Meanwhile the AUD is little changed at Looking at during the overnight session with 0.7904 after trading in a 30 pips range overnight. Risk aversion weighed on the AUD, but solid commodity performance was an offsetting force.
Oil prices got a boosts from an EIA report that showed last week crude stockpiles fell for an eighth week (-3.3m barrels) and motor fuel inventories dropped by 1.22m barrels. Both WTI and Brent closed the session over 1% stronger. Meanwhile the iron ore price is down 2.3%, largely reflecting yesterday’s decline in the active futures contract. Looking at the contract today, after initially trading lower, it stabilised later in the session to end the day up 0.52%.
Speaking in Midland, Fed Kaplan reiterated his preference to be patient on Fed funds rate, noting that technological breakthroughs are preventing the tight labour market from triggering inflation.
Technically the Jackson Hole Policy Symposium starts today 6 pm mountain time. But given that we are 16 hours ahead, the Symposium only really gets going tomorrow morning at 10 am Sydney time. Still, undoubtedly today’s headlines will become more and more focused on the Symposium as the day goes by.
Meanwhile there are no major data releases on the calendar today. This morning New Zealand publishes its trade data for July, the UK gets is second Q2 GDP estimate and the US releases its weekly jobless claims along with Existing Home Sales ( Jul) and the Kansas City Fed Manf. Activity (Aug).
The Jackson Hole Symposium topic for this year is on “Fostering a Dynamic Global Economy.” The program will only become available at 6pm mountain time, but we already know that Fed Chair Yellen will be speaking Friday morning (8am mountain time/midnight Sydney) and ECB President Draghi will speak in the evening at 5 pm (Saturday 9 am Sydney).
Fed Yellen’s Jackson Hole speech is on financial stability. US financial conditions are currently very easy, despite the fact that we have had two Fed rates hikes this year, hence there is a risk that she notes that it is not just evidence of higher inflation that is going to be driving decisions on further Fed tightening. Any comments along this line could push the USD and front end UST yields higher. Meanwhile, Draghi is not expected to make any policy remarks, but there is always a risk that he says something.
On global stock markets, the S&P 500 was -0.35%. Bond markets saw US 10-years -4.71bp to 2.17%. In commodities, Brent crude oil +1.20% to $52.49, gold+0.3% to $1,289, iron ore -2.3% to $77.82, steam coal -0.1% to $98.35, met. coal -0.1% to $195.00. AUD is at 0.7905 and the range since yesterday 5pm Sydney time is 0.7882 to 0.7918.
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