March 19, 2019

Markets Today: May have to delay for another day

The markets are on-hold ahead of the FOMC meeting later in the week.

Today’s podcast

Overview: Holdin’ pattern

  • Markets quiet ahead of more decisive news on Brexit and other events later in the week
  • Commons’ Speaker prevents May from re-tabling the same deal; GBP loses some edge
  • AUD now hugging 0.71 after trading back lower overnight since late yesterday
  • Commodities mixed: iron ore and oil higher, gold unchanged, base metals mixed
  • Equities making some modest gains
  • RBA Minutes today (11.30): don’t expect a new policy tilt; it’s a summary of the pre-GDP Board meeting
  • RBA’s Kent speaks on Bonds and Benchmarks at the KangaNews DCM Summit at 9.00am; Q&A might provide some soundbites but let’s be realistic about what to expect on that front

It’s been an overnight holding pattern with little to no data and markets trading in familiar ranges.

The only data of note was the US NAHB Housing Index for March which revealed a steady and still high level of 62, the two “single family sales” present and future components both higher but the prospective buyer traffic component down.  The rally in the bond market in recent months seems to have done the trick by restoring borrowing affordability for prospective buyers.

The USD has been steady, the DXY index at 96.487 this morning, right in the middle of its range of recent days ahead of the FOMC. US Treasury yields are also little changed, both two and 10 year yields up 1-1.5bps overnight.  European bonds were also little changed, Germany’s 10 year bund at 0.083%.

With the EU Summit approaching later this week, all eyes have been on whether PM May can get another deal together with the Europeans that would get the support of sufficiently more MPs in the Commons, before the Summit.  It seems not.  Sterling is down 0.37% since late afternoon trade yesterday to 1.3230-35 as the possibilities on the next big steps come back into contention, not that they were far away.  (The AUD/GBP is at 0.536 this morning; the AUD also down from its late yesterday highs in the 0.71s.)

The Speaker of the House of Commons warned PM May that she will not be able to re-table the same Brexit deal to another parliamentary vote, thanks to a convention dating back centuries that stops a government from re-tabling the same proposal as tantamount to bullying of the Parliament.  She can only put it to a vote if there are substantial changes to it.  Another proposed deal then would likely require at least a meaningful change to the Irish backstop, a key point of contention.  Given the EU’s stand seems to be that negotiations have finished on the Withdrawal Agreement, if that’s right then time’s up, and so the odds of May’s soft Brexit plan being approved now have fallen dramatically.

Earlier, there was talk of May not getting the required support of the DUP anyway, feeding a weaker GBP.  The media report that May will ask the EU for a nine month extension, which means several more months of uncertainty about the endgame for Brexit, but likely some further near term relief rally in Sterling, subject to the other potential political developments.  Those next big possibilities include: the status quo in terms of leadership as May battles on for another nine months, a PM leadership challenge, fresh elections, a second referendum on Brexit, and revoking Article 50 all still remain in the mix.

On the commodities front overnight, the larger mover has been in Dalian iron ore and Chinese steel rebar futures, both up by over 1% amid the continuing uncertainty over the supply from Brazil.  It also comes ahead of updates from the industry at the Global Iron Ore & Steel Forecast Conference being held in Perth tomorrow and Thursday in Perth.  The Conference includes updates from BHP, Fortescue, from the Singapore representative of the Dalian Futures exchange, and more.

Just released this morning, NZ Consumer Confidence for the first quarter shows Confidence back down from 109.1 to 103.8.  It’s not a market sensitive release.

Coming up

  • First up is a speech from Chris Kent, RBA Assistant Governor (Financial Markets) speaking on Bonds and Benchmarks at the KangaNews DCM Summit, Sydney at 9.00am AEDT.  While it’s a speech of interest for the market in terms of appropriate benchmarks, spreads and the like, the broader market will be interested to know whether Kent would chance his arm in the Q&A on Q4 GDP, very recent data and any particular views on housing, the economy and monetary policy.
  • For the Kiwi, for tonight’s GDT dairy auction is expected to see a further gain in the weighted price index, in the order of 2-3%, reinforced by Fonterra’s recently downgrading of its supply forecasts.  That would take the recovery in dairy prices from November up through the 25% mark.  Whether that proves to give the NZD any new support amid Brexit news and ahead of Thursday’s NZ GDP (together with the FOMC and AU employment releases) seems doubtful.
  • Then comes the RBA Minutes from this month’s Board meeting.  Recall that this was the day before the disappointing GDP report, Phil Lowe’s speech on Housing and the Economy the next day also preceding the release of the national accounts by two hours.  Unexpectedly, at that speech he gave a straight down the line account of what was discussed at the Board meeting, the importance of the labour market to the RBA as its go-to economy barometer and the balanced upside/downside policy outlook at that speech.  This of course brings into focus Thursday’s Labour Force report and ensuing labour market indicators, especially of labour demand.
  • To requote from Lowe: “The Board will continue to assess the shifts in the global economy, trends in household spending and how the tension between the labour market and output indicators resolves itself. We have the flexibility to adjust monetary policy in either direction as required. There are plausible scenarios under which the next move in interest rates is up. There are also plausible scenarios under which it is down. At the moment, the probabilities appear reasonably evenly balanced. Given these various cross currents, the Board’s judgement remains that the most appropriate course is to maintain the cash rate at its current level.” (Our emphasis.)
  • There is also the Statistician’s measure of House Prices being released this morning, this one for the December quarter.  It’s a re-configuraton of the same CoreLogic prices data base and therefore of no market consequence, much more recent monthly, weekly, and daily prices now available up to last weekend.  (Email me if you’d like to see a copy of our weekly resi wrap, released on Mondays.) In the September quarter prices the ABS measure dropped 1.5%, down 1.9% y/y.  The consensus looks for another 2.0% decline, down 5.0% y/y.

Market prices

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