May 31, 2017

Markets Today: Pressure down

There was little in the way of significant market moves overnight.

Instead focus returned to the economic data where eyes were on the inflation figures for both the US and Germany – German CPI was slightly weaker than expected while the US PCE was in line with expectations – with neither showing any lift in the underlying pace of inflation despite the labour market in both countries having tightened significantly over the past year. Pressure it seems is down when it comes to inflation, also the title of John Farnham’s 1986 hit from his Whispering Jack album.

While the US PCE was a touch stronger than expected in the month, up 0.15% m/m against expectations of a 0.1% rise, the rise wasn’t enough to lift the annual rate. Core PCE is now running at 1.5% y/y, a 16-month low. If the monthly pace of inflation persists, that would only be enough to lift core PCE to 1.7% by years end – still below the Fed’s 2% target.

Against that background, the USD dollar (DXY) fell 0.2% across the board overnight, while US Treasury yields fell 3.84 bps to be at 2.21%. Despite those moves, markets still think the Fed will hike in June – ascribing a 83% probability, and 1.4 rate hikes are priced for the rest of the year.

The Fed’s Brainard (voter, dove) expanded on the inflation puzzle confronting the Fed. In sum the unemployment rate at 4.4% is quite low relative to recent decades and previously has been associated with an outbreak of inflation, while at the same time inflation and wages haven’t really lifted and if anything have disappointed. While Governor Brainard seems content to hike in June, she is cautious on the outlook for inflation, stating “if soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy”. These comments are broadly in line with the FOMC Minutes last week.

Other US data was mixed. Consumer Confidence was slightly below expectations at 117.9, but the index remains at very high levels and is broadly suggestive of positive consumer spending in the period ahead. Reinforcing this, US consumption data was positive; nominal spending rose 0.4% m/m while real spending rose 0.2% and this should make Q2 GDP stronger than Q1. For Payrolls on Friday, the “jobs plentiful” less “hard to get” series out of the Consumer Confidence report rose to 11.7 from 10.9 and continues to signal a tightening in the labour market (Chart 1).

German inflation data was slightly weaker than expected at 1.5% y/y against expectations of 1.5%. The Euro did fall on the news but recovered to be 0.2% higher overnight at 1.1187. A report that ECB policymakers could upgrade their economic risk assessment at next week’s June meeting kept alive the possibility of a change in forward guidance despite Draghi’s softish tones yesterday.

Topping the currency leader board today was the NZ Dollar (+0.6%), followed by the Yen (+0.4%) and the Aussie (+0.3%). The Yen was supported by strong economic data yesterday, though there is little evidence to date that inflation is picking up in Japan.

As we go to print the Pound has fallen sharply (-0.5% since 7.00am) with a YouGov/Times poll showing the Tories could lose 20 seats at the upcoming June 8 election.

Commodities were mixed overnight. The oil price did fall with Brent -1.0% to $51.78 a barrel and dragged on equities with the S&P500 Energy sub-index falling 1.3%, though overall equities were down by less with the S&P500 -0.1% and Eurostoxx -0.5%.

Coming Up

It’s a quiet day domestically to end autumn with only April Credit Statistics (11.30am AEST). NAB is in line with the consensus in expecting credit growth to remain subdued at 0.4% m/m, up marginally from March’s 0.3% increase. Your scribe’s eye will be on the pace of business credit growth which has slowed sharply over the past three months.

Across the Ditch the RBNZ publishes its Financial Stability Report, along with a press conference by Governor Wheeler (9.00am AEST). The report is likely to highlight improvement prospects for the dairy industry and continuing concerns around the housing market.

International focus will be on the Chinese PMIs (11.00am AEST) and on European inflation data (19.00am AEST). Other data out includes Japanese Industrial Production and the US Beige Book and Chicago PMI – a potential herald for the more important Manufacturing ISM on Thursday.

For the Chinese PMIs, the market expects the Manufacturing PMI to be 51.0, a touch lower than last month’s 51.2.  The Eurozone inflation data is expected to be 1.5% y/y for the Headline and Core is expected to be 1.0% y/y.


On global stock markets, the S&P 500 was -0.12%. Bond markets saw US 10-years -3.84bp to 2.21%. In commodities, Brent crude oil -0.98% to $51.78, gold-0.5% to $1,262, iron ore +0.0% to $58.50, steam coal +0.3% to $74.10, met. coal -1.0% to $172.00. AUD is at 0.7465 and the range since yesterday 5pm Sydney time is 0.7443 to 0.7470.

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