February 23, 2017

Markets Today: Up, up, and away

It’s a rather odd world scene right now. Geopolitical factors abound across the globe, with markets again focussing on European politics again overnight, but despite all this and the uncertain shape of US growth, tax and trade policies, the global economy has started the year in rude economic health with evident momentum.

It’s a rather odd world scene right now.  Geopolitical factors abound across the globe, with markets again focussing on European politics again overnight, but despite all this and the uncertain shape of US growth, tax and trade policies, the global economy has started the year in rude economic health with evident momentum.

Earlier this week, we have already seen Euro-zone PMIs printing on the strong side for February with Germany’s Manufacturing PMI at 57 and France’s only just behind at 56.  That level of growth is on a par with the state of US Manufacturing.  Last night’s German Ifo survey for February was again not only on the strong side of expectations, but “strong”.  The Current Assessment index component, the component that tracks GDP, printed at 118.4, up from 116.9 (consensus was steady at a still healthy 116.9).  Along with a brief period of growth in 2010-11 that was subsequently scuttled by the European debt crisis, February’s reading was the strongest reflection of the economy since 2006.

This release did not spur buying of the Euro, nor push up bund yields.  The opposite was occurring, the market instead focussing on polls for the upcoming Dutch and French elections.  A Dutch poll showed the far right PVV party gaining in popularity, spurring selling of the Euro below 1.05 and a widening in the German-French 10y bond spread to 82bps.  Later in the European session, this all reversed with news that French Presidency centrist candidate Francois Bayrou withdrawing from the race and throwing his hat in the ring behind Emmanuel Macron to support the campaign against Le Pen.

The Euro, along with other major non-USD currencies has in the past hour had another leg up courtesy of some selling of the USD in the wake of the FOMC Minutes from their January 31-February 1 meeting.  The markets were looking for guidance on whether the upcoming March 16 meeting was any more likely than the one third chance being priced by the market.  Instead, there was no killer punch to suggest March is closer to if not above a 50% chance.

Many (FOMC members) saw a hike “fairly soon” providing the economy is on track.  Fairly soon is more evasive than say “soon”. There were also comments (again) emphasising the gradual pace of hiking rates, tinged with concerns about downside risks of further dollar strength against upside risks from fiscal stimulus. But even there, some saw risks from some “potential policies” (trade wars?).  Fed Governor Powell has also been speaking this morning and he was also unspecific on timing, saying that the Fed can raise rates gradually and that a hike is warranted “reasonably soon if the economy is on track”.

Next Friday’s payrolls will be especially important in what it says about wages growth and thus the implications for inflation.  January average hourly earnings underwhelmed, and even then despite mandated increases in the minimum wage across many States.

What data that was available from the US was positive.  Existing Home Sales continued growing in January, sales up 3.3%, more than countering December’s 1.6% decline (revised a tad higher).  Median sales prices in January ($US 230,400 for single family homes; think about that in the Australian context) were up 7.3% y/y, seemingly unruffled to date by higher mortgage rates in recent months.

The AUD has been in cross fire of all this, having been untouched yesterday by a somewhat underwhelming Construction report for Q3 and still soft wages (though not softer).  Since the FOMC minutes, it’s been one of the beneficiaries of this little spate of USD selling, popping above 0.77 again and ahead of Capex today.  On the commodity front overnight, iron ore has held on to most of the previous day’s rally, down $0.56/t to $94.30, while coking coal was up $0.55/t to $161.55.  Oil was down while gold is little changed, on net.

Coming Up

It’s the second leg of the Q4 investment partials today with the New Private Capital Expenditure Survey.  There’s what it says about business investment in the December quarter, the market looking for a 0.5% contraction as the LNG project spend wind down continues.  NAB is looking for a somewhat larger 3.2% q/q decline.  And there is the investment intentions data update for the current financial year and the first estimate for 2017-18.  NAB’s estimate for the current financial year is for practically no change from the previous survey’s $107bn and then a decline to $74bn for next year on the back of further LNG wind downs.  We will be interested to see whether the move up in bulk and base metal prices has driven any noticeably increase in capex spend to lift current production, let alone lift capacity.

More Fed speak tonight with Fed Presidents Lockhart (nv) and Kaplan (v, more hawkish, in the “three” camp, estimating three recently as a “pretty good guess” (his words).  It’s not a heavy night for data with a revised Q4 GDP estimates for Germany, the UK CBI Trends Survey, with weekly Jobless Claims in the US along with house prices, the Chicago Fed National Activity Index and the Kansas City Fed Manufacturing survey.


On global stock markets, the S&P 500 was -0.14%. Bond markets saw US 10-years -0.89bp to 2.42%. In commodities, Brent crude oil -1.54% to $55.79, gold-0.4% to $1,232, iron ore -0.6% to $94.30, steam coal -0.5% to $79.75, met.coal +0.3% to $161.55. AUD is at 0.7705 and the range since yesterday 5pm Sydney time is 0.7667 to 0.7715.

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For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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