A further slowing in growth
Admittedly I never heard this Oasis song before this morning and I was surprised to learn that it was a top 10 hit in 2007.
Noel Gallagher has described this song as “Somewhat predictably brilliant”, I would say is not bad, and certainly not brilliant. So what’s the link? Well, the big theme from the overnight session was the news that Trump’s corporate tax cut plan from 35% to 20% could be phased in over 5 years. The USD and UST yields were already drifting lower during our Asian session yesterday, but the news was an additional factor that weighed on both assets overnight. US equities were also unimpressed with all major equity indices currently down between 0.05% and -0.35%. GBP has been the outperformer in G10 currencies and in commodities oil prices have continued to edge higher.
So while nothing is set in stone yet, it is clear that the US administration and Republican leaders are still struggling to find savings to make up for their wish to reduce the country’s corporate tax. We know that the Ways and Means panel will release the text of a bill on Wednesday and now reports overnight suggest that the Committee is considering a phase in approach to reduce the corporate tax from 35% in 2018 to 20% by 2022 ( 5 years at a decline of 3% p/y).
While the USD was already on the back foot, news of the “phase in” plan was seen as an additional excuse to sell the big dollar. Both DXY (-0.43%) and BBDX (-0.27%) indices have given back some of last week’s decent gains. In G10, GBP has outperformed ahead of the BoE rate decision on Thursday suggesting the market is gearing up for a hike which is currently priced at just under 90%. Somewhat surprising, CAD (-0.17%, USDCAD 1.2825) has been the only G10 currency unable to outperform the USD, despite the fact that oil prices have continued to climb with Brent up another 0.8% to $60.91 and WTI +0.4% to $54.13, the dovish BoC last week is seemingly still weighing on the Lonnie.
After briefly trading sub 1.16 yesterday morning, EUR has been on a steady rise despite mixed economic data releases. A soft USD has been a factor, but on the positive front there also appears to be an increase in optimism in Spain after opinion polls suggest Catalan’s will vote against independence in December. Euro area economic confidence surged to its highest level in almost 17 years while German CPI data came in 0.2% points below expectations. So despite the country’s very strong economic backdrop, the CPI data highlights the challenge the ECB faces in getting inflation higher in the EU area.
AUD has traded in a 32bps range over the past 24hrs and currently trades at 0.7690, marginally higher (0.10%) relative to yesterday’s opening level. China’s PMI data today will be important for the AUD (see more below), but ultimately US events later in the week (FOMC, ISM, Fed Chair nomination and payrolls) are the ones that will dominate and determine whether the Aussie can make a sustain move back above 77c.
NZD is essentially unchanged at 0.6880, but it did come under pressure yesterday following headline reports that the new Finance Minister suggested in a weekend TV interview that revising the RBNZ mandate could lead to lower interest rates if an employment target were included. Jason Wong, our BNZ market strategist notes that anyone who actually watched the interview would have noted how well the new Finance Minister came across from a markets’ perspective – he talked of being fiscally responsible and that the RBNZ would maintain its focus on price stability. Jason thinks the market is over playing concerns over likely changes to the RBNZ act.
As for US data releases, PCE US Sep personal income printed in line at +0.4%, while spending was solid and a tenth stronger at +1% m/m. Meanwhile the low PCE (1.3% yoy) deflator was consistent with the quarterly numbers released last week.
We have a pretty full calendar today with lots of second tier data releases and a few important ones too. Of note, Australia gets its weekly confidence reading, the September HIA New Home Sales report and private sector credit (Sep). Also this morning, the ANZ Business Survey is out in New Zealand (likely to be election affected?) along with building permits for September. Then at midday (AEDT) China releases its official Manufacturing and non-Manufacturing PMI’s. The BoJ makes its policy announcement this afternoon and later in the day GDP and CPI data for the EU area are out in Europe. Lastly Canada releases its monthly GDP reading and the US gets Employment Cost Index, Chicago PMI and Conf. Board Consumer Confidence (Oct).
China’s official manufacturing PMI is expected to ease up to 52.2 in October from 52.4 previously. So while still in expansionary mode, the consensus view suggests a bit of a slowdown in growth is expected at the start of Q4. There are no forecasts for the official Services PMI, but in September the index came at 55.4. The big question this time around is whether the likely slowdown in construction outweighed the buoyancy in the services sector. Details in the PMI’s are also going to be important with the new export reading with the New Export relevant for the AUD.
As for the BoJ we don’t expect any big surprises. The Bank should keep its foot firmly on the easing pedal while talks of tinkering with Yield Curve Control remain premature. The flat lining CPI seen in September (ex- fresh food 0.7% yoy and ex-fresh food and energy 0.2%) points to an increasing risk the Bank will revise lower its forecast for FY17 (median estimate at 1.1% Mar-18), but FY18 and 19 numbers should remain unchanged. IF we are right we should see little JPY reaction from the BoJ.
The market is looking for an unchanged outcome for EU inflation in October, 1.5%, but base effects from oil prices and the softer German CPI suggest the risk are tilted to the downside. Meanwhile the advance reading for the EU area GDP is expected at 0.5% following an upwardly revised 0.7% outcome in Q2.
On global stock markets, the S&P 500 was -0.30%. Bond markets saw US 10-years -3.43bp to 2.37%. In commodities, Brent crude oil +0.73% to $60.88, gold+0.6% to $1,277, iron ore -2.2% to $58.75, steam coal +0.8% to $99.40, met. coal +0.1% to $181.85. AUD is at 0.7679 and the range since yesterday 5pm Sydney time is 0.7656 to 0.7688.
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