May 16, 2016

Markets Today: Money’s (not) too tight to mention

The rising US dollar in Friday’s APAC session gathered fresh momentum from incoming US data.

The rising US dollar in Friday’s APAC session gathered fresh momentum from incoming US data. Retail sales rose by 1.3% headline, and the core so called ‘Control’ reading by 0.9%, confounding the gloomy profits and trading reports from several bricks and mortar retailers earlier in the week. Shortly after, the University of Michigan’s consumer sentiment index jumped to its highest level since April last year (95.8 from 89.0).  Given Amazon’s stellar earnings report last week, the message would appear to be that consumers are in pretty rude health, driven by employment gains and now some pick up in earnings growth, but aren’t rushing to spend their hard-earned cash at Macys. After autos and gasoline, on-line shopping was the third best performing category in Friday’s report.

Also published right towards the close of Friday’s APAC session (6:00pm AEDT) was the China April loan data. These were much weaker than expected and confirming the front-loaded nature of this year’s lending intentions by state-owned banks in particular.  New Yuan Loans slumped to just Y556bn from 1,370bn, and Total Social Financing to 751bn from 2,336bn. The data pushed AUD/USD back down to APAC session lows just below 0.7280, but the lows for the day (0.7254) came almost immediately after the US consumer sentiment report and which is when the USD hits its highs for the day (and week). Weakness relative to expectations in Saturday’s China’s data has added fresh weight to the AUD this morning, taking us below 0.7250.  Industrial production was 6.0% YoY down from 6.8%, retail sales 10.1% YoY down from 10.5% and fixed asset investment 10.5% YTD YoY down from 10.7%.

The JPY was the only currency to strengthen against the USD Friday (USD/JPY -0.36% to 108.63).  The narrow DXY added 0.49% to 94.61 (+0.8% on the week) and the broader BBDXY 0.46% (+0.9% on the week).

Rather than the data serving to bring forward expectations for the timing of Fed tightening, a weak performance by US equities saw the probability of the Fed Funds rate being 25-points higher by December fall to 60% from 64% on Thursday. The Fed’s reaction function is still more equity dependent than data dependent in the market’s mind, or so it would seem. The S&P lost 0.85% to 2,064.1 (for a loss of just 0.5% on the week, but taking the index below its 50 day average for the first time in two months). All ten S&P sectors ended in the red Friday, the biggest losers being financials, energy companies and consumer staples. Earlier the Eurostoxx 50 added 0.72% and the Dax 0.92% (0.7% Q1 German growth figures may have helped the latter).

In US rates, Treasury yields were lower, 2s -0.8bp to 0.748 (+1.2bps on the week) and 10s -5.1bps to 1.701% (-7.9bps w/w).

Commodities were mixed rather than simply getting hit from the stronger dollar. Crude oil lower by 30-50 cents (WTI -$0.50 to $46.21 and Brent -$0.30 to $47.83) and the China 62% fines iron ore import price -$0.50 to $54.54. But the LMEX indeed finished 0.1% higher and gold +$1.5 to $1,272.7.

Sunday’s CoreLogic RP Data weekend auction data shows a preliminary capital city average clearance rate of 68.9% versus last weekend’s final 67.7 with auction volumes down on last week (1,824 from 2,230).  Melbourne cleared a preliminary 70.6% down from a final 73.2% and Sydney 75.6% up from 71.8%.

Coming Up

An important week in Australia with the RBA May Board Minutes Tuesday and the Employment report Thursday. The Following the SoMP, the market goes into the Minutes pricing 40 basis points of easing over the next 12 months with one Cash Rate cut fully priced by October.

For Thursday’s employment report NAB is forecasting employment growth of 16k in the month, enough to keep the unemployment rate unchanged at 5.7%. The market consensus is for somewhat weaker employment growth of 12k and the unemployment rate expected to rise to 5.8%.

Globally, highlights include US CPI and industrial production (Tuesday) and FOMC minutes (Wednesday). Japan has Q1 GDP on Wednesday. RBA Assistant Governor Debelle also speaks Wednesday on Global FX Markets.

Nothing of note locally today and just US existing home sales and the Empire manufacturing survey tonight.


On global stock markets, the S&P 500 was -0.86%. Bond markets saw US 10-years -5.15bp to 1.70%. On commodity markets, Brent crude oil +0.48% to $47.83, gold-0.2% to $1,273, iron ore -1.9% to $54.54. AUD is at 0.725 and the range 5PM Friday Sydney has been 0.7237 to 0.7300.

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