May 11, 2017

Markets Today: Playing with fire

The RBNZ made its policy rate announcement a few minutes ago and while the OCR was left unchanged at 1.75% as expected, the Bank failed to deliver a tightening bias.

Not only has the OCR tracker been left unchanged, the Bank also sees the recent spike in inflation as transitory and indeed it has lowered its year ahead inflation forecast. A big call from the Bank, considering inflation has been higher than its forecast for each of the past 3 quarters (and the Q1 miss along being 0.7%). Our BNZ colleagues believe the RBNZ is playing with fire and retain their view that an earlier tightening will be needed. Meanwhile the market has clearly been disappointed by the Bank’s outlook. Overnight NZD made decent gains against all major crosses reflecting a bit of short covering action, trading to 0.6941 against the USD just before the announcement. Now NZD/USD is almost one big figure lower, trading at 0.6847.

Looking at the overnight price action, on paper, ECB President Draghi Dutch Parliament appearance had the potential of being the big event, but with Draghi sticking to his dovish bias the big move came from oil following an EIA report that showed the biggest draw in nationwide crude inventory since December while gasoline stockpiles fell by 150k bbl to 241.1m bbl against expectations of a 300k rise. US equities had a mixed day, DJ was -0.16%, S&P500 0.11% and NASDAQ 0.14%.

The EIA news triggered a rally in oil prices helping WTI oil climb over $1 to 47.34 while Brent moved above the $50 mark (both up over 3%). Unsurprisingly, in G10 oil linked currencies have been the biggest winners with NOK up 0.74% and CAD up 0.40%.The AUD was also another outperformer, up 0.15% over the past 24hrs and although the move in oil gave the aussie a small uplift, the intraday chart shows steady gains throughout the overnight session with the RBNZ decision dragging the AUD a few pips lower early this morning. AUD is currently trading at 0.7358, after trading to an overnight high of 0.7389.

US treasury yields have climbed a few bps in the overnight session. The move higher in oil was an initial catalyst, but a softer 10y bond auction was the biggest factor. The $23bn 10y refunding auction cleared with a 2bp tail and the lowest indirect bidding interest since December. The move in oil pushed 10y UST from 2.37% to 2.385% and the auction boosted yields to 2.41%. Higher USDT yields and an unchanged gold has seen USD/JPY make a decisive move above ¥114. USD/JPY traded to a low of ¥112.41 on Monday and now it trades at ¥114.33.

ECB President Draghi presented to Dutch Parliament and he gave a cautious tone regarding the inflation and policy outlook.   Draghi said that changes to the ECB’s policy guidance and rates will only come when inflation is solid enough to continue without the support of monetary stimulus.  “Is it time to exit or time to think about exit or not?’ This time hasn’t come yet”.

Coming Up

Now that the RBNZ rate announcement is behind us, our APAC session has a pretty light calendar with Australia’s consumer inflation expectations (May) and Japan’s current account (Mar) the two highlights. Later in the day, the European commission publishes its economic forecasts and it is a busy day in the UK with industrial production, construction output and trade balance all due for release ahead of the Bank of England policy rate announcement and inflation report. Weekly jobless claims and PPI figures are the data highlights in the US and Fed Dudley speaks on Globalisation in Mumbai (20:25 pm Sydney time).

Australia’s consumer inflation expectations had a decent jump at the start of the year and since then the weighted mean of responses in the 0-5% range (the preferred RBA measure) has drifted a little to just below the 2.50% mark. Nevertheless the relative steadiness in inflation expectations over the past few months has been an encouraging factor for the RBA’s inflation outlook which sees the core measure getting back to the target band by mid-2018. More recently market measures of inflation expectations have started to drift a bit lower following the decline in oil prices. As such it will be interesting to see if Australia’s consumer inflation expectations have managed to remain steady in May.

While no policy rate surprises are expected by the BoE with market participants and economists unanimously expecting the Bank to stand pat, the market is likely to focus on the Bank’s new set of forecasts which are also due for release. The preliminary Q1 GDP reading revealed the economy grew at 0.3% well below the Bank’s expectations of 0.6%. As such it will be interesting to see if the Bank expects the economy to rebound or decelerate further over the coming quarters and the role consumption is likely to play given the decline in real wages in recent months. The inflation outlook will also be important, inflation is currently running a little bit above the Bank’s February forecast (2.3% vs 2.1%), driven by a faster than expected pass-through from  the decline in the Pound. Finally the Minutes should also garner some attention particularly if there is still some appetite for a “withdrawal of monetary stimulus over the course of the forecast period”.


On global stock markets, the S&P 500 was +0.11%. Bond markets saw US 10-years +1.64bp to 2.41%. In commodities, Brent crude oil +3.26% to $50.32, gold+0.2% to $1,219, iron ore +0.0% to $60.75, steam coal +0.3% to $74.10, met.coal +0.0% to $177.00. AUD is at 0.7358 and the range since yesterday 5pm Sydney time is 0.7336 to 0.7394.

Good luck.

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