August 30, 2016

Markets Today: Mixed emotions

Apparently this 1989 hit by the Rolling Stones was written by Mick Jagger as a response to Keith Richards solo effort “You don’t move me”.

Apparently this 1989 hit by the Rolling Stones was written by Mick Jagger as a response to Keith Richards solo effort “You don’t move me”. Richards referred to the track as “Mick’s emotions” believing it was about a feud with Jagger, while Jagger denied any feud claiming the song was about a girl.

Well we have also seen a bit of mixed emotions in the overnight session. US equities started the week on a positive note, but their European counter parts opened the week in negative territory. In a quite night for currencies, the USD also had a mixed performance gaining a bit of ground against the EUR, JPY and GBP while AUD and NZD have outperformed. Meanwhile, and perhaps more interestingly, US treasury yields have rallied overnight reversing most of the selloff seen post Yellen’s speech and Vice Chair Fischer remarks on Friday.

Comments from Yellen that the case for raising interest rates “has strengthened in recent months” along with Fischer observation that the Fed Chair’s (Yellen) remarks implied the Fed could raise rate twice this year triggered a repricing in Fed hike expectations with the probability of a September hike jumping from 33% to 42% on Friday and December’s probability climbing to 76% from 68%. Now, in the overnight session, we have seen a reversal in expectation with September’s probability down to 35% and December to 72%. So, while a September hike and another in December remain a strong possibility, ultimately it will all come down to the data with Friday’s non-farm payroll looming large.

US income and spending figures for July (0.4% and 0.3% respectively) were also released last night and although the data was in line with expectations, it confirmed that the strong consumption seen in Q2 has carried over into Q3 and it also suggests a solid Q3 GDP number should be expected. Meanwhile, the PCE deflator for the month was unchanged with the core figure up 0.1%.The core deflator has now been unchanged at 1.6%yoy for five months, however the consensus is still for a small pick up towards 1.9% by the end of the year. This would be one argument for a hike in December and no hike in September.

Looking at currencies in more detail, it is interesting to note the USD resilience despite the fact that we have seen partial reversal on Friday’s the jump in US Treasury yields. Meanwhile the improvement in risk appetite appears to have benefited the NZD and AUD. Both currencies have steadily risen overnight, gaining about 0.25% and 0.15% respectively. The NZD is currently trading at 0.7254 and the AUD is at 0.7569.

Coming Up

In Australia, this morning we get the weekly consumer confidence reading, which has been testing new highs in recent weeks. Additionally, out this morning are building approvals for July.  The pullback in approvals is expected to have continued in July and our economists expect a decline of 2% in the month, below consensus forecast of a 1.1% rise.

As a prelude to the retail sale figures on Thursday, the NAB online retail sales report is also due out today and it may provide an indication of what to expect on Thursday.

Looking at offshore markets, Japan is likely to be the focus today with unemployment, household spending and retail sales data all due for release. The consensus forecast is for the unemployment rate to remain unchanged at 3.1% and unless we see a big drop in the number, inflationary pressures from wage growth are unlikely to trouble the BoJ or the JPY for that matter. More of a concern for the Bank should be the household spending numbers. In June the yoy measure fell by 2.2% and the consensus for July is for another soft print of -1.5%. That said, anecdotal evidence as well as hot weather and holidays suggest an upward surprise in spending could be on the cards.

The UK releases its building approvals for July, which should be interesting given that it will be the first data point of this sort since the UK referendum. Europe issues its final August reading of its Business climate indicator and Germany releases its preliminary CPI print also for August. The consensus number is for a 0.5% yoy outcome, up from 0.4% in the previous month.

Moving onto the US, it’s a pretty light day in terms of data releases with C-S Home prices and Consumer Confidence Index the two highlights.  Another soft home prices outcome is expected in June (-0.1%) while consumer confidence is seen to have remained practically unchanged in August (97 vs 97.3 prev). Although if the Michigan reading is any guide, a softer print should be expected.


On global stock markets, the S&P 500 was +0.52%. Bond markets saw US 10-years -7.01bp to 1.56%. In commodities, Brent crude oil -0.61% to $49.27, gold+0.1% to $1,323, iron ore +0.0% to $59.14. AUD is at 0.7571 and the range since yesterday 5pm Sydney time is 0.7542 to 0.7581.

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