Today’s podcast

https://soundcloud.com/user-291029717/one-day-after-the-fed?in=user-291029717/sets/the-morning-call

Overview: Big time

• A day on and the USD in back
• US Treasury yields up; stocks struggling but ended close to square
• Powell’s “low inflation likely transitory” comments resonate
• BoE: still the fog of Brexit, but Carney is getting mildly hawkish on the underlying UK economy and inflation risks down the track
• Oil prices take some heat; WTI down >3% on more supply news
• Building approvals today and non-farms tonight

A day on from the FOMC and the market has taken to heart Fed Chair Powell’s comments at his press conference that the low inflation of late is likely to be transitory, a key reference that was not in the post-meeting Statement that simply referenced that “On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.”

There was some two way action yesterday after the Statement when the dollar softened, only to reverse after the press conference after the clarification.  The market has pushed on overnight with further support for the USD, the DXY index up to 97.83, reversing the mini shake down into the FOMC and immediately after. 

In response, the AUD and other majors have lost some grip, the AUD back testing 0.70 this morning, hamstrung by relative carry.  Earlier this week, the market was building in a 69% chance of a Fed hike by the end of the year.  That’s now been pared back to 50%.  US Treasury yields rose along the curve now that the end of the month is out of the way too, two years up just over 4bps as we go to print, 10s up a little more, by 4.33bps and despite a sizeable pull-back in oil prices during the session.

WTI is down over $2/bbl, a decline of 3.19% for the session on news on apparently greater supply news out of the US with the EIA reporting a 10mb rise in crude inventories to their highest level in two years and Russia not cutting production in line with targets last month.  Oil of course has had a big run up this year, buoyed recently on tightened US sanctions on Iranian sales and the ever-worsening situation in Venezuela: some pull-back may well have been due.

Payrolls tonight are expected reveal still robust levels of payrolls growth (190K) but there’ll be more than one eye on what the report says about average earnings growth that’s expected to grow a meagre 0.1%.

The BoE meeting, revised economy forecasts and Carney press conference produced some price action in Sterling markets, but not enough to see Cable rally against a resurgent USD.  The read through of limited UK spare economic capacity and an economy that’s travelling a lot better than feared in this period of dense Brexit fog has seen the Mark Carney-run BoE to side with a bias for higher rates than markets have predicted for much of Carney’s tenure. Even as the economy has been hobbled by Brexit, the BoE has maintained a preference for gradual-paced, limited-extent tightening of monetary policy over the forecast period.

As Gavin Friend has reported in the wake of the BoE meeting, while other Advanced Economy central banks remain huddled under their duvets, the BoE Governor thinks it’s time to once again wheel out the higher rate mantra, telling a press conference today that, “there are insufficient hikes in the current curve” for the BoE’s remit.

The BoE raised its growth forecasts while inflation is seen as easing this year to 1.6% by the end of the year before rising to over 2%, supported by inflationary pressures, something that challenges the BoE’s 2% inflation remit.

GBP tried to rally today on the initial BoE headlines – though markets were primed for the BoE to sound more hawkish given better GDP outturns and calmer global markets. GBP has since slipped back against a slightly better bid USD, but holds gains against the EUR.  Not only has the AUD slipped a little against the USD but also against sterling, trading this morning at just under 0.54.   The next big support level for the AUD is 0.6980 as support, the level that also gave way in the earlier flash crash.  (Email me if you would like to get David Coloretti’s Technical Analysis reports.)

Sterling has been at the forefront of non-USD G10 currencies that have lost ground against the big dollar.

In other news, a Global Times opinion piece speculated that a US-China trade agreement might have hit an impasse as there were few details revealed after the end of the latest set of meetings.  We wouldn’t read too much into that as it contradicts a report yesterday by Politico that a deal was closing in, with some agreement on how the US will roll back the punitive tariffs in place, the last key sticking point. It went further to suggest that expectations are high that the two sides could announce a deal by the end of next week, setting the stage for a summit between Trump and Xi to sign it. A later report on CNBC backed that view up, suggesting a trade deal announcement as soon as next Friday.

Finally, the economic news overnight was not particularly earth-shattering. US Jobless claims for the week ended 27 April were higher than expected at 230K but likely reflecting seasonal adjustment issues, while after the better than expected US Q1 GDP report, measured Q1 productivity bounced by 3.6% (buoyed by the inventory build and net exports), if still up a tidy of 2.4% in year to terms.  Whether that’s a secular rise remains to be seen.  US Factory orders were a little stronger than expected (1.9%; F: 1.6%), encapsulating the already-released Durable Goods orders report.

Coming up

• Today: In another wise scant calendar today sits AU Building approvals for March.  Just to refresh memories, in February, approvals jumped a surprising 19.1%, thanks to nothing less than a 65% jump in private apartment approvals numbers concentrated in NSW and Victoria, both up by more than a third.  Analysts therefore look for some payback given current headwinds facing residential apartment developers.  There are hints though thought that sales of detached houses are flattening out, but further trend falls in apartment development would not be any surprise.  NAB looks for a 23% decline in total approvals in March.

Friday night

• EC CPI April: headline inflation is expected to tick up to 1.6% from 1.4%, thanks to the higher oil prices, there’ll be even more focus on core CPI also up from 0.8% to 1.0%, though this is expected from the normal holiday price boost effect from this year’s late Easter than any acceleration in underlying inflationary pressures.  The later Easter likely has buoyed this year’s usual Easter holiday and accommodation cost rises, pushing up measured inflation.
• Non-farm Payrolls: more jobs but no more wage rises?  Payrolls averaged 223K last year and have averaged 184K so far this year.  The market’s expectation of a 190K April gain would place such growth right on the year to date average track more or less, and add another data point to a relatively solid growth thematic.  There’ll be interest in whether there is any uplift in average hourly earnings that are tipped to rise just 0.1% in April, seeing annual growth drift lower to 3.2% from 3.3%. Over-3% growth in nominal earnings means that real wages are rising at a faster rate than previously thought, supportive of consumer spending.
• The US ISM Non-manufacturing release for April is also out and is expected to print at 57.0, up from 56.1, solid, only half a step down from last year’s 58.9 average.  It will be interesting to see what the survey says qualitatively about the economy, last month’s survey still mostly optimistic about overall business conditions and the economy even though they were concerned about employment availability and capacity constraints.
• The March US goods trade balance for March is also released and likely more newsworthy from a trade perspective as much as what it says about net exports contribution to growth.  The deficit is expected to print at 73bn, down from 70bn.
• There is a “deficit” of Fed speakers tonight (any suggestions for what is the collective noun for economists or central bankers?), Fed President Evans speaking in Sweden and nothing less than seven at a Hoover Institution “Strategies for Monetary Policy” Conference at Stanford (with other speakers).  See the list of speakers and topics here.

Market prices

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