Today’s podcast

https://soundcloud.com/user-291029717/us-dollar-heading-to-2018-lows?in=user-291029717/sets/the-morning-call

Overview: Give a little bit

• USD moves lower, the DXY now below 90
• AUD tracking around 0.78 ahead of wages today and employment tomorrow
• World dairy prices still very elevated; Kiwi close to 0.7250 this am
• Hopes of an Iran-US nuclear deal sees oil prices about face lower
• US stocks weaken in the last hour
• Euro/UK stocks were more resilient earlier
• Little change in bond yields overnight

It was mostly an uneventful overnight market, but stocks have taken a step lower later in the session, not helping the case of the USD, the DXY moving down to its lowest level in four months. Oil prices did an about face, earlier supported before heading lower  on hopes of a US-Iran nuclear deal. US Treasury yields were mostly little changed, before the 10y Treasury eased a little further to 1.6369%, -1.2bps. Though not quite in the same time sequence, European and UK bond yields were little changed, the 10y bund up 1.2bps to -0.102% and the 10y gilt at 0.868%, +0.3bps.

US equities have taken a turn for the worse in the past hour, the S&P down 0.85% and the Nasdaq down 0.56%, led by energy stocks and falls in some of the tech majors, Facebook -1.7% and 1-1.2% falls in Apple, and Amazon, Alphabet. European equities were little changed, the E600 index up 0.17%, but the E50 index off 0.31%. US homebuilder stocks were down 2.61% in the wake of softer than expected US housing starts for April.

The USD has taken another step lower overnight, the DXY breaking below 90, currently sitting at 89.79, within clear sight of its mid-February 2018 low of 88.25.  There was no clear proximate daily trigger (stocks falling more later in the session, the USD soggy throughout), though one Bloomberg writer opined a correlation between vaccinations and currencies over time and that the European program had stepped up another gear recently, supporting the Euro. From the open in London, among the major currencies, the Euro is up 0.5% to 1.2228, cable +0.19% to 1.4192. The AUD and NZD rose by 0.20% and 0.24% respectively,  the AUD tracking close to 0.78, the NZD around 0.7250.

Base metal prices rose further, LME copper and nickel up 0.3%, tin popping its head again over $30,000 to $30,455, +1.87%, the best in the base complex. Singapore iron ore futures pulled back after earlier gains but remains north of $200/t at $208.15 having pulled back in recent days on the back of official concern from Chinese officials voiced for several days now over higher commodity prices.

US housing starts and permits came and went without any discernible market rection from the USD and bonds, though it didn’t help the case of US homebuilder stocks. Even though the market tends to focus more on housing starts, that series tells you as much about the weather, and the inevitable lumpiness in starts according to project timetables and capacity. April Starts were down 9.5%, slicing a large piece off the Mar 19.8% m/m gain that rebounded after the bad weather-affected crimped building activity in Feb. April building permits (a closer reflection of demand, if over time) were very close to expectations at 1760K, following on from the large lift in sales during the second half of last year, levels remaining high if choppy into this year.

The pipeline of US resi construction activity still looks quite healthy as builders face into rising costs, incl lumber, notwithstanding timber prices may have peaked for now. Even so, mortgage applications for purchases a more sober outlook than the NAHB housing index that remained high in this week’s report. Following today’s starts data, the Atlanta Fed reduced its Q2 GDPNow estimate to 10.1% from 10.5%, cutting its estimate of Q2 residential investment to 10.6% from 19.2%.

Elsewhere, testifying to the House of Lords, BoE Governor Andrew Bailey and fellow MPC members Ben Broadbent and Dave Ramsden were speaking, their comments on inflation very much in a similar vein to those from most Fed views on the transitory element in the current rise in inflation. Bailey noted that while the BoE is very vigilant on inflationary expectations, the inflation gain is likely due to energy and is temporary. He did say that while it’s useful to have negative rates as a possible tool, the BoE is nowhere near any talk of whether to sue negative rates. EURGBP has been somewhat higher in the aftermath of these comments. .

In the overnight GDT dairy auction, the price index was little changed at -0.2%, sustaining the high level of prices, up about 42% y/y. Last week our BNZ colleagues lifted their milk price forecast slightly to $7.80 per kg/milk solids for farmers and noted that little change in product prices and the NZD from here would translate into a $9 payout for next season – not a forecast, but an indication of the current strength of the dairy market and the “cheapness” of the NZD against a very strong terms of trade backdrop, not dissimilar to the AUD right now.

As my BNZ colleague Jason Wong has already noted this morning, oil prices moved higher initially, Brent crude breaking up through USD70/bbl before selling emerged, prices pulling back after the BBC reported the Russian envoy in Vienna saying that significant progress had been made in efforts to broker an agreement between Iran and the US to revive the 2015 nuclear deal. A positive outcome here would the pave the way for increased oil supply from Iran – the best-case scenario (for oil production, not prices) would be an increase in 4m barrels a day from Iran within three months.

Coming up

• The main data event today for the AUD and local rates market will be the Q1 Wage Price Index, central as the outlook are for the inflation outlook for the RBA.
• The previous WPI surprised to the upside at 0.6% q/q driven by the unwind of temporary wage cuts introduced at the onset of the pandemic in Q2 2020. Wage cuts subtracted a similar amount from WPI in Q2 to they added in Q4, suggesting that most of the wage cuts have been unwound. It is also worth noting that the headline WPI series measures hourly rates of pay excluding bonuses, and so doesn’t capture one off backpay or bonuses that anecdotes suggest have been prevalent. Last year’s award wage decision will also continue to provide support, with the final tranche of 1.75% increases, covering the remaining 1/3 of award-reliant employees, taking effect from 1 February.
• We pencil in 0.4%q/q for Q1 (1.3%y/y), expecting continued subdued wages growth in the public sector owing to ongoing wage freezes and deferrals, and an assessment that this release will pre-date much of an uplift from the rapid tightening in the labour market seen from February. Note Q1 WPI reflects prevailing pay rates in the pay period ending on or before 19 February.
• The pattern of timing of wage increases has been unusual over the pandemic period, and there is little visibility of the amount of temporary pay cuts still to unwind. We note upside risk should off cycle or larger pay increases have been common into February 2021 which is earlier than our base case that these are more likely to provide support from Q2.
• Also out today is the May WMI Consumer Sentiment survey , consumers seeing generally positive economic news, this survey taken in part of last week’s Federal Budget and news the housing market is continuing in a positive fashion for home owners if not prospective buyers.  While we do not have a forecast, it would be a surprise if sentiment does not remain well above average this month, if not even higher than the 118.8 index level for April.
• Offshore tonight, the UK releases is April CPI (L: 0.3%/0.7%; F: 0.6%/1.5%; Core y/y L: 1.1% F: 1.3%) as well as House Prices for March, final Eurozone CPI for April (Prelim 0.6%/1.3%; F: 0.6%/1.6%; Core y/y L: 0.8% F: 0.8%), US weekly mortgage application for w/e May 14, as well as Canada’s CPI for April and Teranet House prices, also for April.
• The market will be sifting through the FOMC Minutes of the 28 April meeting for any more clues from the discussions around the nature of transitory inflation as well as any noted discussion of tapering. There has of course been many speakers since the meeting, including from Fed Chair Powell including at the press conference, from FRB Governors Brainard, Clarida, most singing from the transitory inflation hymn book. There is more Fed speak tonight, including Bullard, Quarles, and Bostic as well as ECB Chief Economist Phillip Lane, and the ECB’s Panetta and Rehn. The ECB publishes it Financial Stability Review.
• Negotiations on Capitol Hill continue, the Biden Administration seeking to fashion a bipartisan deal with lawmakers with more discussions with the Republican party over infrastructure.

Market prices

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