Below trend growth to continue
It was another quiet session overnight with an ever so slight risk-off tone (Yen, Gold, Vix higher and Treasury yields lower) ahead of Thursday’s key risk events – ECB, UK Election and testimony by former FBI chief Comey.
As for Comey’s testimony, this may not be as controversial as first thought with US media noting Comey will not say President Trump interfered with the Flynn probe (see link). With little on the radar internationally until then, domestic focus over the past couple of days has been on the likelihood that Q1 GDP could print a flat to a slightly negative outcome today (see Coming Up for details).
US Treasury yields fell 3.8bps overnight (although most of that decline occurred in the Asian timezone yesterday) to 2.14%, around the levels seen in mid-November and the lowest YTD. UK Gilts lead the outperformance with yields down 5.7bps to 0.98% ahead of Thursday’s UK election. While the polls indicate the Tories are likely to be re-elected, after being wrong-footed by Brexit and Trump markets are still being cautious and assuming some defensive positions.
The moves in Treasuries were also likely supported by a Bloomberg article noting that China was prepared to increase holdings of US Treasuries. Indeed, according to the latest TIC data this is already happening with China increasing its holdings of US bonds in March by $27.9bn to $1.09 trillion, the largest increase since March 2015. The TIC data also noted Japanese investors had increased their holdings by $2.4bn. Together, this plays into the view that as the Fed unwinds its balance sheet, there will be willing buyers to take up the slack.
Of the data released overnight, most was ignored by the market. The only significant piece was US JOLTS where job openings rose 259k to 6.0m in April, the highest in the history of the series which dates back to 2000. Job hiring’s however decreased 253k to 5.1. While the gap between openings and hirings is suggestive of a skills mismatch, importantly for the Fed it is also likely to support future wages growth as firms compete for skilled labour and train existing staff.
The US dollar (DXY) fell 0.2% overnight. The Yen was the clear outperformer, up 0.9% with JPY ¥109.40 and at its lowest levels since late April. The Kiwi was also strong, up 0.6% to $0.7183, having earlier breached the 72 mark. My colleague Jason Wong noted the moves possibly reflected traders closing out short positions with the dairy auction broadly in line with expectations (average winning price up 0.6%, the sixth consecutive positive result).
The Australian dollar hit a wall of confusion overnight. It initially fell 0.4% on the weak net exports and government spending figures yesterday, which also gave fuel to the notion of a weak GDP number today, but then fully reversed the moves on a more neutral than expected RBA Statement. The RBA indicated it would ignore the likely weakness in Q1 GDP and will continue to hold faith in growth picking up to a 3% pace. The Aussie currently trades at $0.7508 and the GDP data will hold the key to whether it can be sustained at these levels.
In commodities the Brent oil price rose 0.7% to $49.83, while WTI was up by a slightly stronger 1.0% to $47.88. Supporting oil prices overnight were soundings from Qatar that it would stick to the OPEC oil production ceiling despite sanctions from neighbouring countries. Also providing support was the prospect of strike action with Norwegian oil worker holding wage talks Friday.
All domestic focus will be on the Q1 GDP figures (out 11.30am AEST). NAB thinks a negative print is still odds on and forecasts a -0.1% q/q outcome. In contrast, the market consensus still sits in the positive territory at +0.3% q/q with a very wide range (-0.5 to +0.7!). This is despite partial indicators suggesting a strong likelihood of a flat to a small negative outcome – your scribe attributes this to the old adage followed by market economists of not changing original forecasts on the back of partial data due to the fear of your original forecasts coming true, and so a weaker number still has the potential to move markets.
Internationally it is very quiet and we have to wait to Thursday to get any top-tier data. Across the Ditch today we have ANZ Job ads and Manufacturing Activity Volumes. In Europe we get the final version of Q1 GDP with GDP expected to remain 0.5% q/q and 1.7% y/y.
On global stock markets, the S&P 500 was -0.28%. Bond markets saw US 10-years -4.35bp to 2.14%. In commodities, Brent crude oil +0.73% to $49.83, gold+1.2% to $1,294, iron ore +0.2% to $56.03, steam coal +1.4% to $76.95, met. coal -5.0% to $143.00. AUD is at 0.7507 and the range since yesterday 5pm Sydney time is 0.7474 to 0.7522.
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