A further slowing in growth
The two big events overnight were a 4.8% slide in the oil price and a surge in European risk assets.
The oil price is now back to its lowest point since mid-November with WTI oil sitting at $45.51 a barrel and below the level that prevailed before OPEC’s oil production ceiling. In the words of ABBA, it seems US shale oil production is presenting a Waterloo moment for OPEC.
A European song title is also a fitting tribute to the fortunes of Europe. European markets have been buoyed by the prospects of centrist Macron winning the second round in the French presidential election on Sunday (May 7). European equities rose 1.2% with the French CAC40 up 1.4% overnight. Betting markets currently ascribe Macron a 91% chance of winning against the Eurosceptic Le Pen while polls put Macron at 61% of the vote.
The Euro too is higher with the EUR up 0.9% overnight and at its highest level for 2017 at $1.0984. Given the strength in European data to date and the abating of geopolitical risk, there is continued speculation that the ECB may communicate a change in its policy guidance at its upcoming June Meeting. ECB Board member Praet played into this tone overnight stating “this is a judgement which will be very much data-dependent”. Consistent with this, 10-year Bund yields rose 6.9bps to 0.39%.
Strength in the Euro dragged down the US dollar with the BB DXY down 0.6% overnight. Other currency pairs were mixed with strength in the UK Pound (+0.4%) and Yen (+0.3%), but weakness in the commodity-linked currencies of Aussie, Kiwi, CAD and Norwegian Krone.
The Aussie fell 0.2% overnight to 0.7407. Since Tuesday the AUD has fallen 1.7% having broken through its 100 day moving average. The decline appears largely due to the fall in commodity prices – particularly oil and iron ore – with little reaction to the Trade Balance or Governor Lowe’s speech. The Iron ore price fell 5.1% yesterday to $65.2 a tonne, but coal prices have been more resilient with thermal coal unchanged overnight at $78.0 a tonne and coking coal down 2.5% to $175.5 a tonne. Driving weakness in commodities has been softer Chinese PMIs of late while the PBoC has also been engineering tighter liquidity conditions.
The surprise for your scribe has been the resilience in bond yields to the moves in the oil price. US 10-year bond yields actually rose 3.3bps overnight to 2.35% with a rise in the real component (+5.2bps to 0.48%) outpacing a fall in the breakeven (-1.7bps to 1.87%)
Part of the resilience in yields may be due to the market not willing to fade the post Fed optimism given payrolls tonight. Recall the FOMC statement yesterday viewed the slow Q1 GDP data as “likely to be transitory” and the Fed continues to expect gradual adjustments in policy with labour market conditions expected to strengthen further. Consistent with this, the market is currently pricing in a 69% chance of a rate hike in June and 37bps of hikes are priced for the rest of the year – or 1.5 hikes left for the year.
Supporting the Fed’s assertions of inflation picking up despite the moves lower in the oil price, unit labour cost (ULC) growth overnight was stronger than expected. ULC growth was 3% against expectations of a 2.7% outcome. Unit labour costs are a key driver and input into models of core inflation and would likely support the Fed’s inflation forecasts; conversely any further acceleration in ULCs would likely see their models predicting a breakout of inflationary pressures.
Finally, the US House of Congress passed the Republican healthcare bill to replace Obamacare by a narrow margin – 217 to 213. It now heads to the Senate where most commentary suggests it has little chance of being passed in its current form and will have to be re-written. Estimates suggest the bill could deliver savings of $150bn over 10 years and partly fund a tax cut plan.
Domestic focus will be centred on the RBA Statement on Monetary Policy at 11.30am AEDT. Governor Lowe gave a preview of this yesterday, noting “overall, our latest forecast is for economic growth to pick up gradually and average around 3 per cent or so over the next few years”. Dr Lowe however did note that employment would need to pick-up to deliver these growth outcomes which puts focus on upcoming labour market reports.
International focus will be on US Non-farm Payrolls and to what extent payrolls will rebound from the weather affected March read. The market expects a 190k payrolls print while the Atlanta Fed’s jobs calculator suggests only 121k payrolls are needed to keep the unemployment unchanged assuming a constant participation rate. Nevertheless the market is expecting a slight change to the participation rate and expects the unemployment rate to tick-up to 4.6% from 4.5%. Jobless claims overnight were again at very low levels and are suggestive of a strong payrolls print. Focus will also be on the average hourly earnings component given the soft inflation numbers and the market expects average hourly earnings will increase 0.3% m/m which would give an annual rate of 2.7% y/y.
There are also a number of Fed speakers tonight with the ones to watch being Chair Yellen, Fischer, and Williams.
On global stock markets, the S&P 500 was +0.01%. Bond markets saw US 10-years +3.07bp to 2.35%. In commodities, Brent crude oil -4.63% to $48.44, gold-1.5% to $1,230, iron ore -5.1% to $65.20, steam coal +0.0% to $78.00, met.coal -2.5% to $175.50. AUD is at 0.7407 and the range since yesterday 5pm Sydney time is 0.7383 to 0.7419.
For full analysis, download report or listen to The Morning Call Podcast
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.