Below trend growth to continue
Any excuse playing homage to David Bowie (originally unreleased promotional film shot in 1969, in case you wondered).
Any excuse playing homage to David Bowie (originally unreleased promotional film shot in 1969, in case you wondered). Monday’s – and late last week’s – warm and fuzzy feeling toward risk markets (that began with the ECB’s efforts to shield the financial sector from more policy-induced pain) hasn’t survived Tuesday. A downbeat BoJ yesterday afternoon got the (bearish) ball rolling, evident in a weaker Nikkei and stronger Yen. This has been followed by some underwhelming incoming US data (big downward revisions to January retail sales in particular) and a renewed lurch lower in oil prices (-75 cents). Iran’s objections to an OPEC production freeze prior to first raising its output to the max, continues to weigh on sentiment. A near 50% drop in the share price of beleaguered Valeant Pharmaceuticals hasn’t helped things either, with healthcare stocks down by more than the oil-price sensitive materials and energy sectors in the S&P 500 (latter down 0.2%).
Treasury bonds have traded quietly in front of tonight’s’ FOMC outcome with yields a touch higher despite the more risk-off market tone. In currencies meanwhile, the Yen is the top performer of the past 24 hours, USD/JPY spending much of the night back below ¥113. NZD is the worse, with AUD/NZD spending time on a 1.13 handle for the first time since last September. This follows the latest Global Dairy Trade auction which produced a 2.9% fall against the pre-auction whisper numbers of +5-7%.
Commodity currencies in generally are all down on oil and poorer risk sentiment but Sterling has under-performed all bar the kiwi. The latest ‘Brexit’ poll – showing the ‘leave’ camp back in the lead and apparently more motivated to vote than the ‘remain’ camp – took ‘cable’ down from 1.43 to 1.415. This is in front of tonight’s UK Budget and where the projected Public Sector Borrowing Requirement is likely to be greater than assumed at the time of the December Autumn Statement, reflecting lower wages, lower inflation and lower economic growth than earlier assumed. Should the chancellor, George Osborne, decide to wield the spending axe even further in order to bring government finances towards balance, then projections on the timing of the first UK interest rate hike may be pushed out even further. Tight fiscal policy means lower rates for longer.
As for the US data, a retail sale was the highlight (or rather lowlight). Though both headline sales ad sales ex-autos both came in 1/10% better than expected at -0.1%, it was the sharp downward revisions to January (both to -0.4% from 0.2% and 0.1% respectively) that resonated. The NAHB housing index also underwhelmed at 58 (unchanged but against 59 expected). PPI was neither here nor there, while the one bright spot was the Empire manufacturing survey (0.62 up from -16.64) but which is a highly volatile series with little bearing on the likes of the manufacturing ISM.
Yesterday morning, both the AUD and Australian yields fell slightly following publication of the RBA’s March Board meeting minutes (AUD/USD to back below 0.75, and 0.7450 now). The Bank concluded in March that there is no debate about whether there is scope for further easing, changing its view from “the outlook for continued low inflation may provide scope for easier monetary policy” to “continued low inflation would provide scope to ease monetary policy further” though again, this was qualified by “should that be appropriate to lend support to demand”. This was nothing new, vis-a-vis what was said in the immediate post-March meeting statement, though our economists note that the tense of “continued” low inflation may be a heads-up to the outcome of the March quarter CPI being important, particularly in the light of other global central banks being concerned about inflation continuing to run below inflation targets and concerns around declining inflation expectations.
The Fed’s pronouncements in the early hours of our Thursday morning (05:00 AEDT) promises to make for quiet markets ahead of the event. That said, the latest US inflation read-out, courtesy of February CPI, has potential to create some volatility. Core (ex food and energy) CPI rose further above 2% in January (2.2% from 2.1%) and is expected to hold there. If US rates do trade higher (or even just steady) out of the Fed (or CPI) then this has potential to lift the US dollar and take a little more of the steam out of the AUD. The recent run-up in US yields (by some 40bps at 2 years) has so far had scant impact in supporting the US dollar. We question how long this can last. US housing starts are also due tonight, and in the UK latest labour market stats as well as the Budget. There’s nothing on the Australian calendar, while New Zealand has Q4 current account data, expect to print a deficit of 3.3% of GDP in 2015.
On global stock markets, the S&P 500 is -0.20%. Bond markets see US 10-years +0.54bp to 1.96%. On commodity markets, Brent crude oil -2.02% to $38.73, gold-1.0% to $1,232, iron ore -4.8% to $52.88. AUD is at 0.7458 and the range has been 0.7445 to 0.7528.
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