Below trend growth to continue
The rise in the USD and short dated UST yields on the back of Fed vice-chair Fisher's comments over the weekend have been partly unwound in the overnight session.
The rise in the USD and short dated UST yields on the back of Fed vice-chair Fisher’s comments over the weekend have been partly unwound in the overnight session amid lack of new news and thin holiday trading. Meanwhile the fall in oil prices has weighed on equities with energy shares the underperformers.
Fed Fischer’s comments over the weekend that the central bank was close to meeting its targets on inflation and employment helped reinforce the hawkish message delivered by regional central bank chiefs last week. Taken as whole, reaction by the market appears to have been the desired one. A week ago the market was pricing around a 20% chance of a September hike and 45% in December, today the OIS curve is suggesting a 27% chance of tightening in September and 62% by December.
Interestingly, however, yesterday during the day pricing of a December hike reached a probability of 69% and 2 year US Treasury yields climbed to 0.7785%, their highest level since 23 June, a day before the UK voted to leave the EU. The small unwound in Fed hike expectations overnight along with the pullback in US Treasury yields ( 2y UST are back at 0.7378% ) appears to be reflecting the view that as much as Fed commentary has been on the hawkish side, Fed speakers have refrained from expressing specific timing on the next hike. So although Fed speakers appear to be upbeat on the outlook for the US economy, the vague timeframe for the next hike also reflects a degree of uncertainty. Ultimately, it will all be about the data.
Moving on to currencies, the CAD has followed the move lower in oil prices and it’s the biggest underperformer against the USD, down 0.6%. News that Iraq will boost its crude exports dragged oil prices lower overnight with Brent and WTI down almost 3%. GBP/USD has been the outperformer gaining 0.46%, the Pound seemingly is still benefiting from last week’s better than expected retail data with record speculative short positions also limiting the downside. The AUD/USD is little changed over the past 24 hours, but after reaching a low of 0.7584 yesterday afternoon the currency pair has been on a steady rise and is currently trading at 0.7627.
As we are about to press the send button, the RBNZ has released a speech from Governor Wheeler which is currently being delivered at a private event in Dunedin. Our BNZ colleagues note the speech emphasises the message contained in the recently released August Monetary Policy Statement, noting that the “expected 35 basis points of further interest rate cuts, balances a number of risks weighing on the economy, while generating an increase in CPI inflation back towards the mid-point of the 1 to 3 percent target range “. So nothing new in the speech, but some disappointment for those expecting a more dovish tone, the Kiwi has moved about 30 pips higher to 0.7309 following the release.
It’s a quiet day locally with the weekly consumer confidence reading the only data release on the roster. Japan is likely to be the focus within our time zone with the August preliminary Manufacturing PMI due out at midday (AEST) and Governor Kuroda speech at 2pm.
After reaching a low of 47.7, Japan’s Manufacturing PMI index has been showing encouraging signs rising over the past two months and printing just under 50 in July ( 49.3 to be precise). All that said, Kuroda’s speech could be the big event within our time zone. On Saturday, the Governor gave a newspaper interview and noted that there is “sufficient chance” the Bank will add to its unprecedented easing at next month’s policy meeting. Kuroda ruled out the use of “helicopter money”, but said that there is “technically” room for deeper negative rates. The Governor’s comments were seen as one of the reasons for the move higher in USD/JPY at the start of the week and so the market will be looking to see if the Governor today adds any more fuel to the “easing fires”.
Europe gets its advance August Consumer Confidence reading along with Preliminary Manufacturing PMIs and no doubt the market will be looking to what extent the UK decision to leave the EU has affected the consumer and economic activity in the old continent. The CBI industrial trend is also out in the UK and the market will be looking to see if there has been further deterioration in manufacturing confidence.
The US prints the Richmond Fed Manufacturing index reading for August along with New home sales (jul) and the preliminary August Markit PMI.
On global stock markets, the S&P 500 was -0.06%. Bond markets saw US 10-years +1.54bp to 1.54%. In commodities, Brent crude oil -3.21% to $49.16, gold-0.2% to $1,338, iron ore +0.5% to $61.23. AUD is at 0.7634 and the range since yesterday 5pm Sydney time is 0.7595 to 0.7628.
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