August 18, 2017

Markets Today: Play It Safe

The Japanese Yen and Swiss Franc top the FX leader board while the AUD is close to the bottom at 0.7884.

In deference to the 1980 song by three of my all-time favourite artists – Iggy Pop, David Bowie and Simple Minds – ‘play it safe’ epitomises market price action over the last 24 hours. US equity indices have all closed with losses of more than one percent. Treasury yields are about 3bps lower on average with December Fed funds tightening risk back to 30% from 40%. The Japanese Yen and Swiss Franc top the FX leader board while the AUD is close to the bottom at 0.7884 and so more than half a cent below the level prevailing in front of yesterday’s local labour market data (but which didn’t prompt much of a response).

The initial catalyst for the risk-off tone was concern and rumour that Trump’s main economic adviser Gary Cohn was set to quit in disgust at the President’s response to the Charlottesville racial violence. Were that to eventuate, it would be seen as driving an even bigger nail into the coffin of hope for tax reform.  While the White House has issued a denial of any such intent (but not Cohn directly, we’d note) the tragic news of another terror attack in Europe, this time Barcelona, has compounded prevailing negative sentiment. And then in the last hour, we’ve had red headlines saying Trump is dropping plans to form an advisory council on how best to spend $1tn. on infrastructure.  This immediately evokes the Groucho Marx quip about not wanting to be a member of a club that would have him as a member.

The other significant news overnight was contained in the summary minutes of the ECB’s July 20th Council meeting, which expresses concern about the risk of the Euro exchange rate overshooting in the future and the tightening of financial conditions implied by the rise in both the Euro and bond market yields. The Minutes noted with concern the rise in real interest rates implied by the latter and says that the still-required favourable financing conditions “could not be taken for granted”.  EUR/USD, already down from above 1.1775 to about 1.17 in front of the minutes, promptly fell to just above 1.1650 but has since recovered to back above the figure.

Our read of the ECB is that as thing stand, a signal of intent with respect to the fate of the QE bond buying programme could still come out of the September 7th Governing Council (GC) meeting, or at latest October, in so far as it is a further significant riser in the euro and or Bund yields, rather than the levels reached in the last few months, that most concerns the ECB at this juncture.

US data overnight has been mixed, with a small downside surprise on industrial production, within which manufacturing output fell by 0.1% against the 0.2% rise exacted. But the Philly Fed survey remained strong (18.9 from 19) US jobless claims fell to their second lowest level since 1973 and the index of leading indicators rose for the eleventh month in row and in line with expectations. Fed speak included resident dove Neel Kashkari repeating his view there’s no rush to raise rates. He also says that the Fed will likely watch debt limit talks when considering when to start balance sheet shrinkage. Bob Kaplan meanwhile has repeated that he wants to see more progress on inflation before the next Fed rate hike.

Coming Up

Ongoing Trump-related firestorms aside, most of the week’s major (economic) events risk are now being us.

China property prices are due this morning (11:430 AEST) but while trends here are of significant medium term importance in regards to housing construction activity and with that hard commodity demand, it won’t be a market mover on the day.

More  interesting offshore tonight will be Canadian CPI – given that markets are about 80% priced for another Bank of Canada rate rise during the 4th quarter – and the preliminary University of Michigan consumer sentiment August read-out.

Canadian CPI is seen lifting to 1.2% from 1.0% while US consumer sentiment is forecast to have lifted from 93.4 to 94.0 (after the July reading showed a quite pronounced dip). This week’s retail sales data told us that the dip fell into the category of “watch what they (consumers) do, not what they say”. We’re also interested in the inflation expectations reading, last at 2.6% and which has not been trending down unlike other inflation related readings of late.


On global stock markets, the S&P 500 was -1.46%. Bond markets saw US 10-years -3.50bp to 2.19%. In commodities, Brent crude oil +1.27% to $50.91, gold+0.7% to $1,286, iron ore +3.3% to $75.41, steam coal +0.6% to $98.05, met. coal +0.3% to $194.00. AUD is at 0.7885 and the range since yesterday 5pm Sydney time is 0.7882 to 0.7963.

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