Below trend growth to continue
A split Bank of England (BoE) decision to keep rates unchanged and another fall in oil prices were the two big events overnight in an otherwise quiet night.
In terms of market moves, equities were slightly lower (S&P500 -0.2%), the US dollar was stronger (+0.6%) while yields were mostly higher across the board.
The US dollar (DXY) rose 0.6% overnight and is up 1.0% since the FOMC meeting on Wednesday. US Treasury yields also rose with 10-years up 3.8 bps to 2.16%, and 2-year yields up 2.0 bps to 1.35%. Despite the US dollar reaction to the FOMC statement, the market still prices just under a 50% chance of another rate hike by December and less than 1½ are priced in through to the end of next year – this despite the Fed dot points pointing to four more rate hikes by the end of 2018. It is likely the market will require a pickup in inflation and wages growth to validate the Fed’s rate track.
The two currencies most resilient to US dollar strength overnight were the Pound (+0.1%) and the Aussie (‑0.1%). Down the bottom of the leader board were the Kiwi (-0.7%) and the Yen (‑1.2%) while the Euro (-0.6%) reflected broad US dollar strength.
The Pound was a story of two halves with it initially dipping lower on a weak retail sales print (core -1.6% m/m against expectations of -1.0%), and then spiking 0.7% on the more hawkish Bank of England to finish at 1.2756. The Committee was more divided than expected with only 5 voting to hold versus 3 voting to raise (Forbes, McCafferty and Saunders). The BoE is currently balancing returning inflation back to target and supporting jobs and activity during Brexit. The dissenters argued this trade-off is lessening given growth in employment to date, while inflation has overshoot the target more than previously thought.
UK yields lifted across the curve in response, taking it as a sign that the BoE is slowly inching its way towards lifting rates. 10-year Gilt yields rose 10.4 bps to 1.03% and 2-years are up a similar 8.4 bps to 0.17%. The OIS market gives around a 50% chance of a rate raise by the beginning of 2018.
The Aussie was supported by an initial rally following yesterday’s strong employment figures (+0.6% and hitting 0.7632) which provided some buffer to US dollar strength, ending down just 0.1% overnight to 0.7579. The employment figures shot the lights out up 42.0k m/m against expectations of a 10k outcome and the unemployment rate fell a full 0.2%points to 5.5% — its lowest since February 2013. The only soft bit to the release was persistently high underemployment at 8.8%, which still is indicative of greater labour market slack than suggested by the headline unemployment rate.
The Kiwi was dragged lower by a weaker than expected Q1 GDP report (0.5% q/q against 0.7% expected).
The other big move overnight was oil. WTI oil fell 1.1% to $44.26 a barrel and since 25 May it has fallen 14.5%. Recent moves reflect Wednesday’s build of US gasoline stockpiles to its highest levels since mid-March, while the International Energy Agency forecasts oil oversupply to persist with rising US shale oil production and production increases in other countries. Oil is also important for inflation expectations and the US 10-year inflation breakeven is now down to 1.69%, well below the 2.1% peak it reached during the Trump reflation trade. This also has implications for nominal yields, with the fall in breakevens accounting for most of the decline in US Treasury yields over the past couple of months.
It is a very quiet day domestically with nothing on the radar. Across the Ditch NZ has the BNZ PMI (8.30am AEST) which will be of interest following yesterday’s softer than expected GDP print.
The Bank of Japan meeting is the only notable event in the Asian timezone, but this too likely to be a non event and no change is widely expected; the Bank normally releases its statement in the early afternoon.
In Europe, EU Finance Ministers meet following last night’s exclusive Eurozone FMs meeting. Europe also has the final read of May CPI with Headline expected to be 1.4% and Core at 0.9% y/y. In the US, the Fed Kaplan (voter) speaks and datawise we get Housing Starts and the Uni Michigan Consumer Sentiment for June – the market looking for a similar read to last month at 97.0.
On global stock markets, the S&P 500 was -0.22%. Bond markets saw US 10-years +3.46bp to 2.16%. In commodities, Brent crude oil -0.57% to $46.73, gold-1.6% to $1,252, iron ore +1.5% to $55.23, steam coal +0.4% to $80.80, met. coal -0.3% to $144.00. AUD is at 0.7581 and the range since yesterday 5pm Sydney time is 0.7568 to 0.7632.
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