A further slowing in growth
It’s a nod to Bastille Day today and with the US President visiting France, declaring in a tweet his “unbreakable” relationship with the French President.
Markets overnight see the AUD at the top of the FX leader board, pushing up through the APAC session and overnight and this morning at 0.7730/35, having already tested 0.7740 in the London session. The NZD has not had the same intra-day further support, but remains north of 0.73 where it reached later yesterday. The loonie also continues to garner some support, not hurt by oil prices increasing somewhat higher overnight. Following in the patter of Norway’s, Sweden’s CPI overnight was higher than expectations, adding to the notion of a turning global rate cycle. NZ’s CPI next week (expected to be soft at 0.1%) and Australia’s the week after (expected at ~0.5%) will be important barometers.
Global bond yields rose. One comment from Yellen’s reprise to the Senate Banking Panel that caught the market’s attention was to the effect that it is premature to say the underlying trend in US inflation is below 2%. She did though hedge that by recognising the two sided risks on inflation. Her comments on the labour market didn’t play so much to a dovish tilt, Yellen again noting that the labour market is quite tight and that there may be pressure on wages. She was also asked on the reduction in the balance sheet reduction and noted that she has no intention of returning it to “that small”, a reference to ~1tr levels prior to the GFC. Unfortunately when answering this question she was interrupted without possibly going on to specify of what reduction she had in mind. Bond traders might have been taking their cue from her comment that she expected some rise in yields during the run-off of the Fed’s balance sheet, even though that’s no revelation.
The seeds for the modest net sell off in bonds came earlier, from bunds, German/European yields higher on news that Draghi will be speaking at the Fed’s annual Jackson Hole, speaking on August 24. He last spoke there in 2014, then outlining QE and who doesn’t like a good conspiracy theory? Also, it’s close to what the market (including ourselves) is thinking in terms of timing when QE tapering might in any case be announced, at the September 7 ECB meeting.
Adding support to the overnight rise in bond yields, we’d also note that oil prices nudged higher. The IEA increased its 2017 global demand forecast and the US EIA reveal a larger-than-expected 7.561m weekly run down in inventories. The market chose to ignore comments from Qatar’s ex oil minister in Istanbul that deeper OPEC cuts would be self-defeating and only play into the hands of the US shale producers.
The US Congressional Budget Office’s (CBO) analysis of Trump Budget was mixed news for the Administration. As expected, there was no forecast nod to the Administration’s 3% aspirational growth, but they did see the deficit around one third lower than their own baseline projections, debt lower as a result. (You can see the CBO report here.) In her testimony, Yellen supported the 3% growth aspiration (“it’s something that would be wonderful if you can accomplish it — I’d love to see it”), but also that “it would be quite challenging”, drawing out the task of lifting productivity from ~1% over the decade to 2% to get there. She said boosting productivity a few tenths would be “a good payoff”. US Budget Director Mick Mulvaney had written an op-ed piece in the WSJ highlighting the 3% goal for sustained growth. You’ll hear more about the coined term “MAGAnomics” (Make America Great Again), something this scribe hadn’t heard previously.
The big release tonight for bond and other asset markets is the June US CPI report, coming with June Retail Sales. The past three CPIs have disappointed expectations and there was a sense in Yellen’s formal statement to Congress that this wasn’t all “one offs”. Will this one add to that lingering low inflation story or gild those out there looking for more resilience in inflation readings? There’s also the June Retail Sales report and what it says about the state of consumer spending and growth in Q2.
Fed’s Kaplan is speaking and there is the UoM Consumer Sentiment preliminary release for July (including medium to long term inflationary expectations). For oil watchers, there’s another week of US rig counts and oil production.
Markets next week will first centre on Chinese growth for Q2 and the accompanying June month activity reports (IP, retail sales, fixed investment.) There’s been more than ample strong suggestions growth will have eased only marginally from 6.9% in Q1 to 6.8% in Q2. There’s still some medium term doubts about growth, but for now at least, and especially so in the lead up to the Peoples’ Congress later this year, growth continues at a healthy clip. The IMF also releases their latest world growth forecast update on Monday, at lunchtime AEDT. (The live press conference webcast is from KL this time.) Their April forecasts saw world growth as “Gaining Momentum” and expected to rise from 3.1% in 2016 to 3.5% this year and 3.6% in 2018. Not a game changer we’d think, but might add to any risk-on market momentum, if apparent then.
On global stock markets, the S&P 500 was +0.19%. Bond markets saw US 10-years +2.67bp to 2.34%. In commodities, Brent crude oil +1.28% to $48.35, gold-0.2% to $1,217, iron ore +2.9% to $65.91, steam coal +0.7% to $83.80, met. coal -4.1% to $164.00. AUD is at 0.773 and the range since yesterday 5pm Sydney time is 0.7675 to 0.774.
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