April 4, 2017

Markets Today: Risk-off, but the US economy still seems Titanium

Titanium was the urban-dance hit of late 2011 and is still a favourite of gym junkies the world around. The lyrics also seem to be an apt description of the US economy where data remains strong even though a risk-off tone has developed over the past couple of days.

That risk-off tone continued overnight with falls in global equity markets and declines in global bond yields.

US Treasury yields fell 5.7 bps overnight to 2.33%. The moves again mostly occurred in the real yield component which fell 3.8 bps to 0.36%, while the breakeven inflation rate fell 1.8 bps to 1.97%. Despite the decline, it is not clear what exactly drove the move and overall markets are focused on the President Xi-Trump meeting on Thursday and on US Payrolls Friday. Traders have been closing short Treasury positions over the past few weeks amidst Congressional gridlock (typified by the failure to pass healthcare reform) and a lack of policy detail on fiscal plans. Comments by the Fed’s Dudley on Friday were also interpreted as hinting at a lower terminal Fed funds rate then currently implied by the Fed’s median dotpoint of 3%.

Dudley stated on Friday “we have maybe 100 to 150 bps of tightening ahead” which some took as implying a terminal rate of 2.50%. However, it is not clear whether Dudley was referring to the terminal rate or to the next couple of years. The Fed’s Harker was out overnight stating the Fed should stick to its plan of hiking twice more this year and that “I don’t want to get behind the curve, but I don’t think we need to rush, either”. The market currently prices 1.5 rate hikes for the rest of the year.

Against that background, US economic data remains strong. The US Manufacturing ISM remained at high levels overnight and was bang in line with expectations at 57.2. Under the hood the details were very strong. The Employment Index jumped to a six-year high of 58.9 from 54.2 and suggestive of payrolls continuing to print strongly in the months ahead. Crucial for the Fed, indicators of inflationary pressures were also higher with the Prices Paid Index reaching its highest level since June 2011 at 70.5.

In the FX space the US dollar was broadly flat. The Yen was the clear outperformer up 0.4% on the risk-off tone while the Euro was also 0.1% higher. The UK Pound was the clear underperformer, down 0.5% following the weaker than expected UK Manufacturing PMI (it fell to 53.3 against expectations of a rise to 55.0). The Australian dollar also underperformed down 0.3% to 0.7603 following the weak retail sales figures yesterday (-0.1% m/m against expectations of a 0.3% increase).

For equities, car manufacturer deliveries garnered the most attention where deliveries disappointed. Automobile stocks led losses on the S&P500 with car manufacturers down 2.6% on the day while the S&P500 index fell 0.2%. The Euro Stoxx was down 0.8% overnight.

Finally, S&P downgraded South Africa’s credit rating to BB+ from BBB- which puts it into the Junk category. S&P cited “internal government and party divisions” which follows the recent sacking of the Finance Minister.

Coming Up

A busy day on the domestic calendar ahead with the Trade Balance, RBA Board Meeting and RBA Governor Lowe speaking. Internationally it is very quiet with the only events to note being a speech by outgoing Fed Governor Tarullo (he resigns effective April 5) and the US Trade Balance (expected -$44.6bn).

For the Australian Trade Balance (11.30am AEST) the market will be focused on whether the trade balance bounces back from its unexpectedly weak read last month (it fell to a $1.3bn surplus from $3.3bn surplus). NAB’s read of loadings at major ports suggests a bounce is unlikely given sharp falls in the amount of coal being loaded in Newcastle, while flooding in key gold mining regions continued in early February. NAB looks for a $1.2bn surplus, somewhat below the market consensus of $1.9bn.

The RBA Board Meeting (2.30pm AEST) is unanimously expected to be on hold, though markets will be paying close attention to the post meeting statement. It is possible the Statement could have a slight dovish tone given the ongoing softness in the labour market and yesterday’s soft retail numbers.

Nevertheless, the RBA has little appetite to ease policy further given concerns over “creating fragilities in household balance sheets” and on the positive side of the ledger the RBA has become more optimistic on the global economy with the March Minutes noting the spillovers to the domestic economy are potentially larger than expected. On risks in the housing market, we do not think the Statement will provide much in the way of assessment given the RBA is part of the Council of Financial Regulators which helped to formulate the recent macro-prudential changes in the first place (alongside APRA and ASIC).

Finally, RBA Governor Lowe is giving public remarks at the post RBA Board Dinner (7.15pm AEST) which will be closely watched for any further nuance op top of the post meeting Statement released earlier in the day.


On global stock markets, the S&P 500 was -0.16%. Bond markets saw US 10-years -4.66bp to 2.33%. In commodities, Brent crude oil -0.75% to $53.13, gold+0.3% to $1,251, iron ore -1.3% to $79.36, steam coal +6.4% to $89.50, met.coal +9.6% to $195.00. AUD is at 0.7606 and the range since yesterday 5pm Sydney time is 0.7592 to 0.7624.

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For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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