May 8, 2019

Markets Today: No deals, no rate cut & little Euro-growth

US equities have been knocked again as increased tariffs from the US on Chinese imports are looking more likely than not.

Today’s podcast

Overview: Sparks will fly

  • Risk off: VIX, DXY up, stocks and bond yields lower
  • AUD back at 0.70 after yesterday’s somewhat patient on-hold statement from the RBA
  • Front end of A$ OIS curve re-priced in size
  • Trade talks look like going ahead Thursday-Friday, with Chinese VP Liu He; but tariff rises still hanging there
  • NZ dairy prices inch higher at the overnight auction: Kiwi tracking AUD and DXY moves: AUD/NZD higher since yesterday’s RBA inaction awaiting RBNZ today
  • RBNZ today under new Committee, with press conference too from Governor Orr: on hold too?
  • Fed commentary adds to no rush to change view
  • German Factory orders still disappointing in March as the US labour market holds its positive momentum

Even though it was revealed by the Chinese Commerce Ministry yesterday that Vice Premier Liu He would visit for the talks on Thursday and Friday, risk sentiment has turned brittle with a rise in US tariffs on Friday seemingly locked and loaded.  Yesterday morning, US Trade Representative Lighthizer confirmed that tariffs on $200b of Chinese imports would rise to 25% starting 12:01am on Friday, citing a reneging on prior commitments by China, also getting moral support from like-minded hawks in the Trump team.  Sources suggest that China is preparing retaliatory tariffs should the US pull the trigger. Pre-meeting tactics or exasperation and no deal?  There is certainly a lot to play for.

It’s not surprising then that market sentiment is back on a knife edge, the VIX index up 3.88 points as we go to press, the US main boards down by 1¾-2% (the Eurostoxx 600 index fell 1.37%), bond yields are lower with German 10y bunds back in negative territory and US 10s down 1.26 bps to 2.4566%.  The US front end has changed little, 2s down by 0.6bps.

On the currency front, it’s been the classic risk-off move back to the JPY and support for the DXY, the commodity currencies lower.  The Norwegian Kroner is at the front of the selling, down 0.56% from late APAC time yesterday, an additional headwind coming from another move down in oil prices, WTI by over $1/bbl to 61.23, now down 8.1% from its 23 April high with news that Iran and the EU are in talks over oil supplies and recent more-than-amply US supply news.

The AUD though has not been too far behind, also held back by risk sentiment, trading back at 0.70 this morning, down 0.38% since the post-RBA bounce, followed by the Kiwi, that slipped by a net 0.22% to 0.66 ahead of today’s RBNZ meeting and a virtually flat GDT world dairy auction overnight, holding on to recent gains in the dairy price.

My BNZ colleague “Dairy” Doug Steel has reported this morning that the GDT Price Index rise of 0.4% is a positive sign, making the eleventh consecutive increase for a cumulative gain of 28.3% since November’s low.  Prices continue to hover around the top of their range since 2014.  After its climb back up yesterday after the RBA announcement, AUD/NZD has pulled back somewhat from overnight highs of around 1.064, currently sitting near 1.062.

With the RBA not signalling any clear intention that they are on the cusp of easing – waiting on more labour market news to clarify whether their expectation of a rise in inflation further ahead remains on track – the AUD bounced yesterday as the front end of the RBA curve re-priced in some size.  June was priced as around a 75% chance yesterday morning; this morning it’s priced as a 20% chance, increasing to 50% for July that was seen as a certainty this time yesterday.

We will be watching all the economic data closely (as we always do!), especially the labour market where the unemployment has been stuck at close to 5% for some months.  Leading indicators of labour demand will be increasingly newsworthy, as of course will be next Wednesday’s Q1 Wage Price Index and whether that plays to the view that the bottom in wages growth has passed with a gradual uptrend still likely, if not absolutely confirmed by next week’s data point.

In economic news, the EC downgraded growth for Europe to 1.2% from 1.3%, as Germany’s growth outlook was cut to meagre expectations of just 0.5% from an already low 1.1%.  German Factory Orders for March revealed only a dead cat bounce, up 0.6% after the 4.0% drop in February.  The report reflected a little less worry on the foreign orders front (up 4.2% after -5.8%), but domestic orders continued to decay, down 4.2% after -1.4% and down 7% so far this year.

In contrast, the US JOLTS Job Openings report for March revealed the still healthy underbelly of the labour market.  (That’s since been followed by the strong April Non-farms report and what the Conference Board’s Consumer Confidence Survey’s measure of its Jobs Plentiful Index that’s continued to trend higher this year.

Comments from the Fed’s Robert Kaplan, Rich Clarida, and Randall Quarles overnight added to the view that the Fed will continue to sit on their hands and is in no hurry to change rates.

Kaplan said that rates are in the right place and that some of the decline in inflation is transitory.  Fed Vice Chair Richard Clarida said the Fed isn’t poised to cut rates to combat (low) inflation, saying he thinks the policy is in place to get “us there”.  He also hosed down rate cut speculation, saying that “I don’t think we’re at that place now” in an interview with Bloomberg TV. Governor Quarles expressed similar sentiments, playing down concerns over weak inflation.

Coming up

  • The RBNZ (2pm Wellington; midday AEST) is the big local event today, first with the outcome of the meeting on the hour, followed 30 minutes later with Governor Adrian Orr’s press conference.
  • As for the RBNZ, 14 out of 20 economists surveyed by Bloomberg expect a 25bps cut in the OCR to 1.5%. The market is slightly weighted towards an unchanged rate today, OIS pricing at 1.65% cf the current cash rate of 1.75%.  Pricing falls away through to early next year, with some 42bps of easing priced into the curve.  This sets the scene for a market reaction, no matter what the Bank announces.  No rate cut would see some temporary upward pressure on the NZD, but the sustainability of any upside is at risk given the US-China trade war backdrop.  The path of least resistance on a rate cut is for a weaker NZD, subject to any forward policy guidance and press conference sound bites.
  • There is also the BoJ Minutes from their March policy meeting out this morning at 9.50.  The Nikkei Japan Services and Composite PMIs are also out this morning at 10.30.
  • After the March Factory Orders report overnight, Germany releases its Industrial Production report for March, the market looking for a 0.5% decline after February’s 0.7% rise.  IP would then be 2.6% down on year earlier levels, Factory Orders pointing to no discernible pick up ahead, weighed down by weak domestic orders.
  • Draghi is speaking tonight, but at a Generation Euro Students Awards organised by the ECB in Frankfurt.  Fed Governor Brainard is also speaking tonight.
  • However, it’s hard to see the market taking its gaze away from trade talks and news with the formal part of the talks Thursday and Friday amid tariff threats.

Market prices

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