February 24, 2017

Markets Today: Read about it

More focus on the US economy and the big dollar overnight in the wake of a spate of interviews given by now-confirmed US Treasury Secretary Steve Mnuchin. He gave his first interview with the Wall Street Journal yesterday and followed that up overnight with two more interviews with CNBC and Bloomberg TV.

The USD has had a mixed 24 hours or so in response.  It’s all sounded quite measured and careful.  No labelling of China as a currency manipulator, development of tax plans and firm intentions to lift US growth but not to be evident till late next year.  No immediate tick either to a border tax and little to nothing on infrastructure.  The USD overall has been softer in response.

In his Wall Street interview he emphasised the importance of lifting growth to 3% and the priority the Administration is devoting to its tax plans.  He said the White House is now working with Congressional Republicans, aiming to get legislation passed by the August recess, an “ambitious timeline” he recognised, adding “it could slip to later in the year”.

Notably he dodged the important question of whether the tax cuts would be revenue neutral, instead highlighting the priority to lifting growth to 3%.  The GOP tax plan includes a border tax (taxing imports and subsidising exports through a cash flow/VAT-style tax), a tax offset that Mnuchin was not giving the immediate green light to in his interviews.  In his CNBC interview he said they are looking at the border tax, but noted that there are issues with it.  (Some have said that such a tax could come with a higher dollar and thus neutralising the intended trade effects of such a tax. Mnuchin recognised the US Treasury as raising such concerns.)

Overnight, the USD has declined by around 0.4% overall, the market is continuing to wait for the important details of the tax/fiscal plans, the absence of any infrastructure details, and that Mnuchin said that the step up in growth to 3% may not occur until late 2018.

Separately, the President has been meeting with large US manufacturers, calling them out to restore US manufacturing jobs and US trade dominance, Trump blasting trade deals and large US deficits with Mexico and China.  Business leaders, also meeting with White House senior officials, have been calling for deregulation, citing restrictions among others from the EPA, health care, aspects of Dodd-Frank legislation and some supply-side technical staff shortages.

The AUD has been an underperformer in this latest mini-episode of USD softness.  Instead it’s been tracking around 0.77.  The strongest performer overnight has been the Pound and despite Austrian Chancellor Kern saying that Brexit is going to be costly for the UK, citing an estimate of €60bn as the UK’s pension entitlement, budget and other obligations.

Elsewhere in Europe, Germany’s second cut of its Q4 GDP confirmed the first estimate of 0.4%, notching up growth of 1.9% for 2016, the strongest in the G7, shading out the UK at 1.8% and the US behind at 1.6%.  And that was all from domestic growth, exports lagging imports.  Not wanting the market to move too quickly, ECB Chief Economist Peter Praet said overnight that the recovery is still dependant on supportive monetary policy  and that the economies are fundamentally fragile.  While Sterling has been stronger overnight, the Euro has been listless.

Coming Up

There’s another big dose from RBA Governor Lowe and his senior team as he testifies this morning before the House Economics Committee.  We’ve already had this week a major scene setting speech from the Governor on Tuesday.  His big picture macro points will no doubt speak to the Bank’s unwillingness at present to push harder on reducing unemployment and getting inflation back into the target band given concerns that another rate cut would only further enlarge an already high level of household debt and that the labour market is relatively stable.

What will be interesting for the market will be the extensive opportunity for the House Economics members to quiz Dr. Lowe on the various aspects and nuances of the outlook for domestic growth and inflation and risks around the RBA’s forecasts outlined in its quarterly Statement on Monetary Policy released earlier this month.  You’d be surprised if there wasn’t a lot of parliamentary interest in the Bank’s monitoring and assessment of offshore events, including not only in the US, but also in Europe and elsewhere and of course views on the level of the AUD.  Is it getting toward the ‘danger zone’?  Dr. Lowe’s testimony is scheduled to start at 9.30 AEDT.

It’s then a light European calendar (any more polls?).  Canada releases its CPI for January, then there’s US New Home Sales for January.  The late month update of the UoM Consumer Sentiment is also out, the market also tracking 5-10 year consumer inflationary expectations that was 2.5% in the Preliminary February survey.  This medium to longer term measure of expected inflation has been relatively steady through last year and into next year, having been as low at 2.3% and as high as 2.6%.


On global stock markets, the S&P 500 was +0.08%. Bond markets saw US 10-years -3.20bp to 2.38%. In commodities, Brent crude oil +1.18% to $56.5, gold+1.4% to $1,250, iron ore -3.1% to $91.34, steam coal +0.1% to $79.80, met coal +0.4% to $162.25. AUD is at 0.7718 and the range since yesterday 5pm Sydney time is 0.7665 to 0.7741.

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