Fed's Waller inches open the US rate cut door
It’s the week of central bank meeting minutes. After Tuesday’s RBA Minutes (and Lowe’s speech Monday) reminded the market the absence of a bias in no way restricts their policy options.
It’s the week of central bank meeting minutes. After Tuesday’s RBA Minutes (and Lowe’s speech Monday) reminded the market the absence of a bias in no way restricts their policy options, overnight we’ve had the Minutes from this month’s BoE MPC meeting and the April 28-29 FOMC meeting. There were not big currency movements, but the Minutes and events since have the market re-thinking.
The BoE Minutes of their election day meeting had a hawkish tinge, supporting sterling in the session, curious given what lies ahead for the economy and the BoE. The Minutes also preceded the BoE’s Inflation Report with its lower growth forecasts and post-election boost to sterling, as well as a prospective sizeable post-election fiscal tightening amounting to £70bn (4% of GDP). The BoE will now be re-calibrating the BoE’s growth and inflation path lower, Governor Carney recently emphasise the deflationary impact of sterling’s rise and still to factor in the fiscal tightening once details are known.
The FOMC Minutes continued to see narrowly balanced risks to the outlook and wondering aloud about the expected temporary nature of the Q1 slowdown. As of April, they considered June unlikely for lift-off and that’s what procured a lot of headline wire coverage. There were plenty of reasons discussed as to why Q1 weakness would/might be temporary, including the weather and the West Coast labour dispute. (We’d add the dollar’s strength and the shale oil industry slowdown too, though these are less temporary.).
As something of a counter, against the overnight main headlines of June being “unlikely”, “a few” did and officials didn’t rule out June. The Minutes highlight that every meeting is “live”. The prospective data flow will tell the story and this week’s housing starts/permits was one the first more positive signs of re-growth of the US economy for some time.
The Fed’s Evans (voter, a noted dove) was speaking and said a trigger for an earlier Fed rate rise (than his 2016 preference) would be a rise in core inflation substantially above 1.5 (core PCE currently 1.3%) or a jobless rate sustainably at 5% (currently 5.4% and falling). He hasn’t closed his mind to a rise this year.
Two NZ releases ANZ Job Ads 8.00, net migration 8.45), then RBA’s Malcolm Edey speaking at a Cards and Payments conference and second tier AU data (Consumer inflationary expectations for May at 11.00; RBA FX transactions for April at 11.30) all coming ahead of the HSBC China Manufacturing flash PMI estimate for May that the AUD is more sensitive to.
The market consensus for the flash PMI is a rise from 48.9 to 49.3. After falling below 50 last December and January, it jumped in February, but that is the odd one out, the PMI since receding to the lowest reading in April for a year.
While we do not have a forecast, we’d be surprised if the trend in Chinese manufacturing had improved in May, so we alert to a disappointment; another decline would be initially negative for the Aussie, a further decline playing into the China still softening story. There’s also a MNI China Business Indicator for May (L: 48.8, the first sub-50 reading this year) due at 11.45.
At midday is the NZ Budget, followed at 13.00 by credit card spending data. We expect the Government announce some delay in its path back to surplus, to 2015/16 from 2014/15. We also doubt that the Treasury growth forecasts will infer OCR cuts.
Tonight, the preliminary May Euro-zone (Germany and France) PMIs, along with UK retail sales and the ECB Minutes. The US data flow kicks up with the Chicago Fed’s National Activity index for April (not market sensitive but a useful composite growth indicator), then weekly jobless claims, the Philly Fed survey for May and the April Existing Home Sales report. There’s also more Fed speak with FRB Governor Stanley Fischer speaking at a ECB Conference in Portugal.
Major currencies relatively steady overall: Eurostoxx 600 +0.4%, Dax -0.0%, CAC +0.3%, FTSE +0.2%. Dow -27 points to 18,285, -0.1%, S&P 500 -0.1%, Nasdaq -0.1%, VIX 12.88 +0.2%. Mumbai +0.7%, Nikkei 225 +0.0% and ASX 200 +0.7%; ASX SPI futures this morning +0.3%. US bond yields: 2s at 0.59% (-3), 10s at 2.25% (-4). WTI oil at $58.76 (+1.3%), Brent at $64.83 (+1.3%), Malaysian Tapis (yesterday) $65.96 (-1.2%). Gold at $1209.20/oz (+0.2%). Base metals: LME copper +0.0%, nickel +0.2%, aluminium -0.3%. Iron ore $57.1/t -2.4% Chinese steel rebar futures +0.1%. Soft commodities spot futures: wheat +0.3%, sugar -2.1%, cotton -0.3%, coffee -2.8%. Euro Dec 14 CO2 emissions at €7.38/t (-0.3%). The AUD/USD’s range overnight 0.7861-0.7915; indicative range today 0.7850-0.7900; the AUD/USD is 0.7874 now
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