Below trend growth to continue
Watching the tears streaming down the face of Pumas head coach Daniel Hourcade a couple of hours ago, ‘Don’t Cry For Me Argentine’ was the obvious title for today’s missive, but it’s already looking a little overused in the Twitter-sphere.
Watching the tears streaming down the face of Pumas head coach Daniel Hourcade a couple of hours ago, ‘Don’t Cry For Me Argentine’ was the obvious title for today’s missive, but it’s already looking a little overused in the Twitter-sphere. So, while next Tuesday sees the ‘race that stops the nation’ that is the Melbourne Cup, less than 72 hours beforehand, we’ll have a sporting event that threatens to stop much of the southern hemisphere spinning on its axis.
As for Friday’s markets, does China’s latest monetary policy easing, right on top of the ECB’s public commitment to intensified easing, reduce EM growth and asset market concerns to the point where the Fed will now find it easier to lift rates his year? Or are these actions a case of The ECB and China getting its retaliation in first upon resigning themselves to the limited likelihood of the Fed moving anytime soon? Or, does the sixth PBOC easing in twelve months, with another cocktail of rate cuts plus RRR cuts, underscore the depth of, and concern for, the China slowdown? Do China’s actions increase or reduce the likelihood that its currency policy will soon have to resume supporting monetary policy with fresh depreciation?
It would be disingenuous to suggest we got a clear answer to any of these questions on Friday. Nowhere was this more evident than in the AUD FX market. The China news (25 points off the key lending and deposit rates, a 50 point RRR cut and full abolition of the deposit rates ceiling) initially added fuel to the uptrend in the AUD that had commenced late in the Australian session on Friday. It pushed AUD/USD up to 0.7295 from around 0.7260, only for the pair to collapse to a low of 0.7202 in the following 90 minutes. We closed at 0.7216, +0.11% over the whole of Friday. In explaining the move, some were quick to suggest that one of the next shoes to drop would be from the RBA, though the move looks to have been more a result of general USD strength post PBoC.
US dollar strength (DXY +0.69%, BBDXY +0.60%) was largely a function of EUR/USD weakness (-0.82% to 1.1018 and USD/JPY strength (+0.64% to Y121.47). Clearly the ECB’s and now China’s actions are seen to have elevated prospects of the BoJ doing something next Friday. EM currencies didn’t fare as badly as majors (e.g. the ADXY index for Asia EM only -0.19%) and which make the AUD’s rapid fall from grace late Friday that much harder to comprehend. We’d also note that Friday’s FX futures positioning data shows the speculative market saw net speculative short positions in AUD re-extend last week.
It was after another big up day for Eurozone equities (Eurostoxx 50 +2.17%) following Thursday’s post-ECB press conference surge. The US S&P500 added 1.1% and the Dow 0.9%. NASDAQ outperformed, + 2.27% aided by some good tech. sector earnings reports.
Treasury yields were higher, on average by 5bps.
Markit PMIs for the US and Eurozone exceeded expectations. The US one unexpectedly rose to 54.0 from 53.1 and 52.7 expected). The Eurozone ‘flash’ composite reading of 54.0 (53.4E, 53.6P) was led by services (54.2 vs. 53.7P and 53.5E) with manufacturing flat at 52.0 (51.7E).
Saturday’s local auction clearance data confirms the slowdown in activity in the Sydney market, with a preliminary clearance rate of 64.6%, up marginally on the prior week’s final 63.7% and which was the lowest of the year. Melbourne cleared 69.8%, down from 72.7%, with the preliminary nationwide clearance rate at 66.6% (from 67.4%).
The week ahead should be dominated by the decisions and statements of the FOMC (Wednesday, so 5:00 AEDT Thursday for the statement), the RBNZ at 7:00 AEDT Thursday and (sometime Friday afternoon) the BoJ. It is really hard to predict with any confidence what the Fed will say or what the RBNZ and BoJ will do.
We have a marginal preference for an RBNZ cut and for the BoJ to sit on its hands for now, but will not be terribly surprised if the RBNZ stands pat and the BoJ announced a further step up in its easing programme. Locally, Q3 CPI comer on Wednesday’s and is the week’s data highlight. China official PMI data is due at midday on Sunday morning (with the Caixin version, for which there is no longer a ‘flash’ estimate, not due until next Monday).
Other than the FOMC, Q3 GDP is the other main US event, released Thursday night so a day after the Fed. Fed speakers will be hitting the wires then, as they come out of the pre FOMC cone of silence. Current consensus on GDP is 1.6%, though the Atlanta Fed’s ‘GDP Now’ estimate is sitting at 0.9%, highlighting downside risks to the market consensus. New Home Sales are due tonight.
Japan has its slug of end-of month data which will all be available to the BoJ before it makes its policy decision. The Eurozone has the German Ifo business survey (tonight) and CPI, several ECB speakers, the EC’s confidence surveys, EZ CPI and unemployment. UK GDP on Tuesday is the main interest there and where the consensus is +0.6%.
• On global stock markets, the S&P 500 was +1.10%. Bond markets saw US 10-years +6.03bp to 2.09%. On commodity markets, Brent crude oil -0.19% to $47.99, gold-0.3% to $1,163, iron ore -1.1% to $51.62. AUD is at 0.7208 and the range since Friday’s local close has been was 0.7202 to 0.7297.
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