Below trend growth to continue
The 1986 film flop starring Madonna and Sean Penn cost $17mn to make and grossed just $2.3mn at the US box office.
The 1986 film flop starring Madonna and Sean Penn cost $17mn to make and grossed just $2.3mn at the US box office. To say it underwhelmed expectations is an understatement. The G20 gathering in Shanghai (Friday and Saturday) looms large this week, and the potential for it to underwhelm runs similarly high.
While we might hope for some assurances from central bankers that they are not engaging in a race to the bottom on negative interest rates and that the Fed is not going to risk further upsetting febrile markets by pushing ahead with ‘gradual’ policy tightening anytime soon, risk is high that central bankers return to home shores and proceed on their (domestically driven) policy ways. The prospect of any meaningful commitment to fresh fiscal support by G20 nations to shore up global growth looks similarly slim, albeit the noises about ‘helicopter money’ being the next policy shoe to drop – Milton Friedman’s concept of fiscal handouts funded via the printing presses – are becoming a little louder.
As for Friday’s offshore markets, following sharply lower openings for US stocks in the wake of upside surprises in the US CPI report (core +0.3% m/m for 2.2% y/y up from 2.1%) the indices steadily recovered through the balance of the day with the S&P 500 ending flat having been -0.8% in morning trade. The US finished weaker in index terms (DXY -036%) despite higher bond yields post-CPI, thanks to a firmer Euro – EUR/USD rallied to 1.1130 after an earlier low of 1.1067 – and a stronger yen (USD/JPY down to 112.63). GBP also got a boost late in the day having earlier ignored a stellar retail sales report ( +2.3% on the month) on news of a deal in Brussels that UK PM Cameron said would enable him to recommend British voters elect to stay in the EU. The ‘Brexit’ referendum has now been called for 23 June. Sterling has given back all of Friday’s gains at this morning’s open on news that popular London mayor Boris Johnson is advocating in favour of Britain leaving the EU.
AUD/USD ended in NY -0.13% to 0.7149 but representing a smart NY afternoon recovery from a low of 0.7069 soon after the US CPI data. Similarly NZD/USD recovered from a 0.6565 low to finish NY -0.18% at 0.6632.
The S&P500’s flat finish meant that on the week it was up 2.8%. The Dow was -0.13% on the day for +2.6% on the week and the NASDAQ +0.38% for +3.8% on the week. Earlier the Eurostoxx 50 finished 0.83% lower but on the week it was +4.2%, European stocks having been more badly beaten up than US indices in recent weeks. The VIX finished 1.1 pt. lower at 20.5, just under 5 points down on the week.
In bonds, 2yr Treasury yields jumped by 5bps on the CPI report to a high of 0.754% and largely held the jump through the remainder of the day (ending at 0.744%). 10 year Treasuries ended +0.6bp at 1.746%.
Commodities saw Brent crude -$1.30 at $33.01 and WTI -$1.10 to $29.64. On the week, oil was little changed (WTI +$0.20 and Brent -$0.35). The LMEX index gained by 1.55% to be 2.8% up on the week and iron ore added $$1.40 to $48.52 (it’s now rallied by 11.2% in the past week).
Fed-speak Friday came from Cleveland Fed President Loretta Mester, a current FOMC voter and noted hawk who said she still backs further gradual increases in interest rates. She sees the U.S. economy as able to ‘power through’ the turbulence from financial markets with the help of the consumer. Also speaking Friday, the ECB’;s Vice-President Vitor Constancio said the ECB would aim to protect banks from unintended harm if it decides next month to ease policy (a firm nod towards the ‘tiered’ negative rates employed by the SNB and BoJ).
G20 aside, other global event risks in the week ahead include Monday’s 5-year outlook for oil prices from the IEA. Incoming opinion polls on the UK ‘Brexit’ referendum represent significant (two-way) risk for Sterling with some potential spill over to FX more broadly (investors won’t be enamoured of the prospect of an EU without Britain) .
There is plenty of US data, covering consumer confidence, housing, durable goods orders, revised Q4 GDP and January PCE and deflator data, the latter of keen interest after Friday’s CPI surprise. Fed speakers are also thick on the ground. Sound bites from G20 officials descending on Shanghai promise to be deafening later in the week.
In Australia, Thursday’s capex data – including updated business spending intentions – is the highlight. The RBA’s Guy Debelle speaks today on interest rate benchmarks today.
On global stock markets, the S&P 500 was flat. Bond markets saw US 10-years +0.53bp to 1.74%. On commodity markets, Brent crude oil -3.70% to $33.01, gold+0.4% to $1,230, iron ore +2.9% to $48.52. AUD is at 0.7151 and the range since Friday’s local close has been 0.7069 to 0.7161.
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