Below trend growth to continue
Incoming US economic data continues to rule the roost, last night’s batch encompassing the manufacturing ISM (strong), construction spending (very strong) personal income (strong), spending (weak) and the personal consumption deflators (weak).
Incoming US economic data continues to rule the roost, last night’s batch encompassing the manufacturing ISM (strong), construction spending (very strong) personal income (strong), spending (weak) and the personal consumption deflators (weak). These collectively conspired to further support the nascent US dollar recovery, push US bond yields higher and give a (mild) lift to US stocks.
Meanwhile reports, courtesy of Market News International, that all the big guns involved in determining the conditions under which Greece will receive more aid – Merkel, Hollande, Juncker, Draghi and Lagarde – commenced talks about two hours ago to discuss a staff level agreement on Greece and crafted by the European Commission, is serving to keep the Euro ahead of most other major currencies bar the US dollar. The ever-volatile Norwegian Crown – that on Friday was the world’s best performing currency after oil prices surged by almost $3, fell victim to a chronically weak purchasing managers’ survey last night and is off an alarming 2.35%. No other currency has lost more than 0.7% in the past 24 hours. Sterling sagged a bit, after its manufacturing PMI undershot expectations at 52.0 from 51.8 and 52.5 expected.
As for the data, it is the rise in the headline manufacturing ISM, to 52.8 from 51.5 and better than the 52.0 expected, that carried the night. This is despite suspicions that, just as Q1 GDP is now regarded as having been depressed not just by the weather but excessively tough seasonal adjustment factors, so the ISM has typically been flattered in the northern Spring months by favourable seasonal factors. The current penchant for ‘seasonally adjust – rinse – repeat’ until volatility in the business cycle is expunged (once thought to be in the exclusive purview of central bankers) is alive and kicking. The test now is whether hard activity (production) numbers will match up to positive signals from survey based data.
Apparently less susceptible to seasonal quirks, a 2.2% surge in US April construction spending (and big upward revision to March) has many analysts leaping to upgrade their Q2 tracking estimates. These currently look to centre on the mid-two percents (The Atlanta Fed’s Q2 estimate is just 0.8%, but is not deemed reliable this early in the quarter).
The antidote to thoughts that the unfolding US economic calendar could yet bring the Fed into play as early as July, if not June, came in the form of the so called ‘core PCE deflator’. This is the Fed’s preferred measure of inflation and dipped to just 1.2% Y/Y in April down from 1.3% and an expected 1.4%. The disparity between this measure and core CPI – the latter dominated by rising implied housing rental cost – has rarely been wider. Until or unless this gap starts to close from below, the Fed is going nowhere.
Today sees the remaining Australian quarterly partials – covering the balance of payments and government spending releases – ahead of tomorrow’s Q1 GDP report and this afternoon’s RBA decision. The balance of payments provides the net exports contribution to GDP as well as the terms of trade, a key ingredient into nominal dollar GDP growth. We look for net exports to have contributed to Q2 growth in the order of 0.3%. We also look for a terms of trade decline of 3.2% in Q1, from the further decline in export commodity prices. For the government spending estimates for Q1, we look for another small positive, up another 0.2% and almost a mirror image of Q4’s 0.3% rise.
As for the RBA Board meeting, it’s almost odds on that the Board will leave the cash rate steady in June irrespective of the weaker Q1 Capex read. But that, together with a desire to do nothing to encourage a retracement of the recent sharp – and doubtless highly welcome – drop in the AUD, means we look for some reference to the scope for further adjustments to interest rates, but likely in a way that will not encourage thoughts that the Board expects to do anything other than sit on its hands at least for the next few months. We should also expect a repeat of the May commentary that “further depreciation (in the AUD) remains both likely and necessary”.
Offshore tonight, the latest Eurozone CPI estimate is due, and in the US factory goods orders, neither of which are likely to be particularly market moving in the context of the much more significant risk events still due this week.
On global stock markets, the S&P 500 was +0.20%. Bond markets saw US 10-years +5.97bp to 2.18%. On commodity markets, Brent crude oil -0.82% to $65.02, gold-0.1% to $1,188, iron ore -0.8% to $61.85. AUD is at 0.7609 and the range was 0.7598 to 0.7668. Indicative range today 0.7575 – 0.7650 (For more market prices, please see p.2 of the pdf).
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