February 5, 2016

Markets Today: The circle of monetary policy life

In the words of my BNZ colleague Jason Wong, not even strong words by ECB President Draghi and BOJ Governor Kuroda have been enough to talk down their currencies against the big dollar’s recent dip.

Some slowing in the US economy in last year, higher credit spreads and $US (tighter financial conditions) has seen the market back out pricing for Fed rate rises this year.  There was a little more of that last night, Fed funds futures now not pricing the next hike from the Fed until August 2017. The USD have up ground against all major currencies bar Sterling last night, including the Aussie that is sitting just over 0.72 in early trade this morning. The Bloomberg spot DXY index eased 0.58%. While financial conditions have been easing in the US, conditions elsewhere through currency transmission channels are likewise tightening, something of a circular process.  In the end, we expect economic performance to be the ultimate arbiter.  With the USD softer, base metal prices rose (LME copper up 1.12%), as did gold (up 1.26%), though not oil signifying continued softness with WTI down $0.63 to $31.65 and Brent down $0.71.  Data released overnight was not especially market moving, US jobless claims up 8K to 285K ahead of payrolls; Dec factory orders fell 2.9%, in line with expectations. Equity markets have been choppy, close to net flat.

In the words of my BNZ colleague Jason Wong, not even strong words by ECB President Draghi and BOJ Governor Kuroda have been enough to talk down their currencies against the big dollar’s recent dip. Draghi talked of further policy stimulus if needed: “we do not surrender to low inflation – and we certainly do not – in the steady state, it will return to levels consistent with our objective”. Kuroda pledged again to cut the negative policy rate further if needed.  USD/JPY is back down below last Friday’s pre-BoJ decision levels.  Dallas Fed President Robert Kaplan called for patience in assessing the outlook. IMF head Christine Lagarde has been speaking noting support for the weaker oil producers (Azerbaijan, Nigeria) but also that the IMF is very bullish on India, a major beneficiary of lower oil prices.

For sterling, the BOE voted 9-0 to keep rates steady, previous dissenter McCafferty voting this time with his MPC colleagues. The BOE’s latest inflation report forecasts CPI at 0.8% this year and 2% not until 2018. The BOE’s Carney said the MPC did not discuss cutting rates but the market remains mildly tilted in that direction.  USD/GBP trades at just over 1.46 this morning after testing somewhat higher and lower levels overnight.

Coming Up

First up this morning is Fed President Mester (v) who is speaking at MNI event on the Fed’s economic outlook and monetary policy.  Then there are two big local releases today 1) retail sales for December month (along with volumes for Q4 that quarter feed into GDP), and 2) the RBA’s Statement on Monetary Policy with its full elucidation of the outlook for the domestic and global economy and their formal forecasts for GDP, inflation, and more.  For retail sales, NAB is looking for a stronger than consensus 0.6% result for the month supported by strong industry anecdotes. The market consensus is 0.4%. As a result, our December quarter volume forecast is 1.0%, a point above the market’s 0.9%.

The outlook for Australian monetary policy lies in the highly uncertain course of the global economy over the next little while together with the uncertain degree of sustainability in what proved to be an improved 2015 for the domestic economy. What can today’s statement reveal about that? Probably not too much other than the risk bias evident in the RBA’s views on whether they have made any material change to their growth, inflation, labour market and other forecast for the Australian economy for 2016 and beyond.

We do not expect large changes to the key forecasts given that the data flow through late last year and the first part of this year has not been materially different from the core forecasts the RBA published last November. Their outlook for the unemployment rate outlook will need to be refreshed from an expectation of a steady 6 to 6 ¼% near term outlook before “gradually declining”. On the day, their more expansive language around the AUD will be minutely analysed.  We expect they will stick to Tuesday’s script that the currency is evolving with the economic outlook.

Tonight it’s pre-much all about payrolls with the market looking for signs of any noticeable fissures in the US labour market aside from month-to-month volatility. The market is expecting headline growth of hundred 190K down from 292K and an unchanged unemployment of 5.0%. The subtext of the report, any revisions, whether the detail is worse or better than the headline, and what it says about average earnings growth will all be trawled over.  Canada releases its January labour market report as well as its January Ivey manufacturing PMI.


On global stock markets, the S&P 500 was -0.20%. Bond markets saw US 10-years -2.77bp to 1.86%. On commodity markets, Brent crude oil -1.86% to $34.39, gold+1.3% to $1,157, iron ore +2.0% to $45.52. AUD is at 0.72 and the range was 0.7154 to 0.7243.

Good luck.

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