March 29, 2016

Markets Today: Must try harder

Before the official start of the 4-day Easter break, there was a bit of good news about the US economy.

Before the official start of the 4-day Easter break, there was a bit of good news about the US economy, courtesy of an upward revision to Q4 GDP, from 1.0% to 1.4% and driven by an upward revision to consumer spending (2.4% from 2.0%).  Fast forward four days, and the Atlanta Fed has just published its latest “GDP Now” estimate of first quarter growth, which has been chopped to a dismal 0.6% from 1.4%. This follows the release of the February data on personal income and spending, the main feature of which was a big (0.4%) downward revision to the January spending figures (from 0.5% to 0.1% in nominal terms, and from 0.4% to 0.0% in real terms).  February spending rose by just 0.1% (as expected). As a result, the Atlanta Fed has knocked down its Q1 real consumer spending estimate to 1.8% from 2.5%. Alongside, the worse than expected January trade data (deficit of $62.9bn) has seen them increase the estimated drag on growth from net exports, to -0.52 percentage points from -0.26.

The negative growth connotations of the personal income and consumption data somewhat deflected attention from their inflation component – in particular the Fed’s preferred core PCE deflator. This held steady at 1.7% in February, against expectations for  rise to 1.8%.  This though is still up from 1.3% a year ago, and it may only be slightly mischievous to suggest that relative to the Atlanta Fed’s latest GDP estimate, inflation in the US is now tracking three times faster than its real growth rate.

This latest batch of US data sets the backdrop for an appearance tonight by Fed chair Janet Yellen before the Economics Club of New York – scheduled for 03:20 AEDT Wednesday morning. Following a somewhat shambolic post-FOMC press conference on 17th March and a string of sound bites from numerous FOMC members since then that suggest they attended a different FOMC meeting to the one Yellen chaired, we can but hope Ms Yellen takes heed of many people’s judgment on her 17 March performance, namely ‘must try harder’.

The overnight US data (the January PCE revision in particular) has had the effect of pulling the US dollar lower and providing support for the AUD by default.  The narrow DXY dollar index is down a third of a percent and the broader BBDXY by 0.36%. Dollar weakness has been led by gains for the British pound (+0.9%) and Canadian and New Zeeland dollars (+0.7%) with the AUD mid-pack within G10 currencies, +0.58% to 0.7546.  With regards to positioning, Friday’s IMM data for the week ended 22 March and which captures ‘Fed-week’ shows overall USD speculative longs down to their smallest since mid-July 2014.

The data also helped pull US yields down, with 5 and 10 year Treasuries both just shy of 2bs lower. US stocks meanwhile are closing virtually unchanged (S&P 500 +0.06% and the Dow +0.11%).

The exception to the weaker dollar has been USD/JPY, and which has risen to a high of ¥113.69, its best level since mid-March. This follows a good showing by the Nikkei on Monday (+0.8%) and intensifying speculation that the Abe government will (again) postpose the rise in the consumption tax from 8% to 10% – currently slated for April 2017. Last Friday, latest Japan CPI data showed inflation static in February, at 0.0% excluding fresh food, but up to 0.8% from 0.7% for the ex-food and energy measure now favoured by the BoJ.  This does nothing to quell speculation of an intensification of the ‘QQME with a negative interest rate’ policy when the BoJ next meets on 28 April.

Coming Up

The end of this week packs such a punch, with US payrolls, the US manufacturing ISM and China’s PMI data that were it not for Janet Yellen’s appearance tonight, the first three days of this holiday-shortened week were otherwise at risk of involving a lot of hand-sitting.

As well as Yellen tonight, we’re also due to hear from FOMC Vice-Chairman and NY Fed President Bill Dudley on Friday – one of the three FOMC members who views count for much more than the various other Fed officials who have been voicing views seemingly at odds with the more dovish message that emanated from the 16/17 March FOMC meeting.

The only local data of any note this week is Thursday’s RBA credit data – after that it’s next Tuesday’s RBA meeting to look forward to.  Elsewhere today, we get Japan’s unemployment, retail sales and household spending data and in the US tonight, Case- Schiller house prices and the Conference Board’s version of consumer confidence.


On global stock markets, the S&P 500 closed +0.06%. Bond markets saw US 10-years -1.58bp to 1.88%. On commodity markets, Brent crude oil -0.40% to $40.28, gold-0.1% to $1,220, iron ore -1.1% to $55.76. AUD is at 0.7543 and the range so far this week has been 0.7493 to 0.7558.

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