September 6, 2017

Markets Today: Oranges and Lemons

The ancient English nursery rhyme was used allegorically in George Orwell’s 1984 to foreshadow the death of true knowledge (and so the advent of fake news, some 50 years before the Simpsons in 2001 foretold of Donald Trump’s ascendency to the US Presidency).

This isn’t the reason for today’s title.  Rather, it’s due to the potential destruction of much of this year’s Florida citrus crop as Storm Irma threatens to make landfall in southern Florida this weekend. Orange juice futures are limit up in Chicago and one investment analyst is suggesting a damage bill from Irma that could top $130bn. Insurance stocks has been hit particularly hard, contributing to a fall of +/- 1% in the main US indices.

The immediate relevance of this for markets is that the US Federal Emergency Management Agency (FEMA) has said it will run out of money by Friday and so be unable to dole out cash related to Irma or the emergency aid required in Texas and other states as a result of Hurricane Harvey.  Senate Republicans are to bring a bill to the Senate on Wednesday to fund FEMA and say it will attach a debt limit bill to the proposed legislation. If it succeeds – though it will have to then pass in the House – it could then go some way to reversing one current source of downward pressure on the US dollar via ever-falling US bond yields which at 10 years have now dropped to their lowest level since November 11th last year. This is why AUD/USD has poked its nose back above 80 cents overnight (high of 0.8028, 0.7996 as I write). The NZD has for the first time in a while outperformed the AUD, helped in part by a positive result for the latest Global Dairy Trade auction (+0.3%). The kiwi has even pipped the yen to the top of the G10 leader board, though gold continues to be the more obvious beneficiary of safe haven concerns related to North Korea than fiat currencies.

That said, there are so many moving parts to the US yields story at the moment there is no guarantee that other influences, including further scaling back of Fed tightening expectations, won’t continue to keep the US dollar pressured in coming days and weeks.  Overnight, we’ve had Minneapolis Fed President Neel Kashkari saying that Fed rate hikes to date may have done real harm to the economy and Fed Board member Lael Brainard remarking that not only should the Fed be cautious about tightening policy further until the Fed is confident inflation is back on track, but also that the Fed would be comfortable with inflation moving modestly above target for a time. Brainard acknowledged the easing in financial conditions, but then said that Fed policy should not be the first line of defence against the build-up of financial imbalances.

The doves are in the ascendency as the moment and it’s futile to fight them, albeit we think the picture could look quite different by the time the FOMC convenes for its last meeting of the year in December.

RBA Governor Phil Lowe spoke last night and elaborated on the post-Board meeting statement. He expressed optimism that there will ultimately be a cyclical rise in wages as the labour market improves, but stressed it will be a while before we are closer to full employment and inflation close to the mid-point of the 2-3% target. The next move in rates should be up, but not for a while. Lowe re-iterated that an appreciating AUD is unhelpful.

Coming Up

A busy day ahead both locally and internationally. Here, Q2 GDP is due at 11:30 AEST followed an hour later by a speech from the RBA’s head of economic analysis Alex Heath (in Tasmania). NAB and market estimates for GDP were lifted after yesterday’s stronger than expected ABS estimate for the net export contribution to GDP (+0.3 percentage points) as well as stronger than expected figures for government investment and consumption (latter together seen contributing as much as 0.5% to quarterly growth).

Both NAB and the market consensus is now at 0.9% (latter up from 0.8% pre-partials, NAB from 0.6%).  Prior to the partials, the range of market estimates was 0.5-1.0%; now it is 0.6-1.3%, suggesting that a print to the upside of the consensus would be less surprising than a downside outcome.  NAB economists agree. If GDP can print at 1% or higher, Australia will be joining the likes of Canada, Japan, Sweden and Norway among the G10 economies to have produced 4%+ annualised growth in Q2 – tangible evidence of both an acceleration and broadening in global growth. For markets, a 1% or stronger print would likely see the currency and local yields higher on the day.

Internationally, the US non-manufacturing ISM release is the data highlight, with market consensus for 55.5 from 53.9 and which follows the upside surprise in the manufacturing version last Friday. We also get the Beige Book ahead of the Sep 19/20 FOMC meeting – what sign of rising wage pressures?  North of the 49th parallel, there’s keen interest in the Bank of Canada’s latest policy decision, with markets attaching a slightly greater than 50% chance of a quarter point rise (from 0.75% to 1.0%). A rise is fully discounted for the October 25th meeting, which we think is the more likely date for a next move. But we wouldn’t be terribly surprised by a move tonight, in which case the recent downtrend in AUD/CAD would take another leg lower.


On global stock markets, the S&P 500 was -0.76%. Bond markets saw US 10-years -9.92bp to 2.07%. In commodities, Brent crude oil +1.62% to $53.19, gold+1.1% to $1,341, iron ore +0.7% to $78.39, steam coal +0.9% to $97.80, met. coal -2.4% to $202.00. AUD is at 0.7996 and the range since yesterday 5pm Sydney time is 0.7942 to 0.8028.

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