Today’s podcast

https://soundcloud.com/user-291029717/feds-quandary-us-spending-rises-inflation-softer

Overview: Watching the river flow

• Quiet start to the week market-wise; USD retreats somewhat into month end re-balancing
• US consumer inflation increasingly benign but yields inch higher; core PCE deflator again underwhelms
• Eurozone confidence still very soggy but the Euro also makes some limited gains
• China PMIs, NZ Business Survey and RBA Credit today

It’s been a quiet start to the week market-wise with the USD cooling a little into the end of the month.  Stocks on both sides of the Atlantic have made some small gains, though since the market has closed, Alphabet has reported earnings that have missed consensus, disappointing with its revenues.  Its shares are down 7% in after-market trading.

Bond yields have inched higher despite another report of benign US consumer inflation, likely flow-driven rather than any reaction to fundamentals.  On the commodity front, the oil market is little changed, gold is softer, base metals prices are mixed, while both Dalian iron ore and Chinese steel rebar futures made some gains yesterday.  There’s been little change in metallurgical and steaming coal futures prices.

With the USD taking a breath into the end of the month at the start of the week, the AUD has been making some limited gains this week, still trading this morning in a 0.7040-60 range, being dragged a little higher this week by the soggy USD apparent also in some support for the Euro.  The start of another month, the FOMC on Thursday morning –also with its Powell presser – together with the US ISM and payrolls will be an opportunity to reset

The March US Personal Income and Spending report didn’t add much to what was learned from last Friday’s US GDP report and the recent March Retail Sales, consumer spending wise.  The Core PCE deflator continued to underwhelm, but US short term yields still ticked higher and with a very modest steepening of the curve.  2y Treasury yields are up 1.01 bps to while 10s are up 2.70bps to 2.5252%.

The report showed US consumer spending rebounded towards the end of the quarter (as was apparent in Retail Sales), providing a good stepping off point for the Q2 figures. Inflation data were softer for March, with the core PCE deflator flat in the month and up 1.6% y/y, the lowest rate in over a year.  On a six monthly annualised basis, the core PCE deflator was down to 1.38%, the lowest since mid-2017.  Even the headline PCE deflator was at 1.5% to March; it’s down to a six monthly annualised rate of just 1.14%.

After the report, the Atlanta Fed’s initial estimate of GDPNow for Q2 has been pegged at 1.5%, the next update coming after tomorrow’s ISM.  (Their final estimate of 2.7% was pretty close to the headline’s 3.2% for Q1.)

It’s going to be very interesting to see what the Fed makes of recent and prospective inflation in its policy announcement Thursday morning and what policy leeway that might provide them.  They will recognise that while there are some special factors at play (there was a one-time technical shift in the clothing component), the y/y rate looks like it could ebb further through the northern summer and at the least not be any grounds for a Fed tightening.  Initially at least they are going to be guided by the activity side, how growth performs and other costs, such as wages, the employment cost index out tonight and expected to be steady at 0.7%.

An increasing number of commentators are buying into the view that the current environment is similar to that of 1995-96 or 1998, where the Fed temporarily cut rates amidst a broader tightening cycle. The Fed is unlikely to give a clear policy signal Thursday and will likely remain data dependent, but market pricing remains consistent with a view that the next move will be a cut, with almost a full 25bps cut priced by the end of the year, followed by another rate cut next year.

Across the Atlantic, and ahead of tonight’s first quarter GDP print, Euro-area economic confidence – a composite of business and consumer confidence – fell to its lowest level in 2½ years.  Q1 euro area GDP is expected to show a small 0.3 q/q% increase, little changed from 0.2% in Q4, leaving annual growth unchanged at a meagre 1.1%, thanks to a struggling German economy.  Germany was also looking weak in the overnight confidence survey report as it has been in the PMIs from trade woes and domestic auto concerns.

In other news, US and China trade negotiators will be back at the table this week in Beijing to finalise an agreement. US Treasury Secretary Mnuchin said that the enforcement mechanisms, one previous sticking point, were “close to done”, although more work needed to be done on some important issues. Officials will meet again in Washington next week and then get Trump involved to decide if sufficient agreement has been reached for a yet-to-be-determined leaders meeting.

Coming up

• First up, there’s the second tier UK Gfk Consumer Confidence and Lloyds Business Barometer released at 9am AEST (midnight London time), then the ANZ Consumer Confidence for the week of 28 March (L: 119.5).
• China releases its official PMIs for April at 11am, particularly for signs of further macro stimulus showing through.  Last month’s Manufacturing PMI picked up sharply from 49.2 to 50.5, a combination of a post-Lunar New Year start-ups and some stimulus.  Last year, there was a particularly large bounce in March, but that was simply payback after a similar LNY-induced February slump.  The market consensus is for no change at 50.5.
• The Non-Manufacturing PMI is expected to be 54.9, up a tick from 54.8, while the separate Caixin Manufacturing PMI (out at 11.45 AEST) is also expected to be 0.1 higher at 50.9, that index having hit 48.3 in January, but up since.  The other Caixin components are not being released until next week.
• Eyes are also focussed at 11am on the release of the NZ ANZ Business Survey for April (L: 6.3).  It’s likely to continue to show sub-par levels of confidence and activity expectations. But next month’s survey will be much more important as it will capture the government’s decision to abandon a capital gains tax policy and confidence could well show a notable rebound in May.
• RBA Credit for March is out at 11.30 where we look for a repeat of last month’s growth of 0.3% that would take annual growth down to 4.0% from 4.2%.  The components are as important as the top line, interest in housing credit and business flows.
• Tonight, the main focus in Europe will be the release of their Q1 GDP (L: 0.2%/1.1%; F: 0.3%/1.1%) and anything telling from Germany’s April CPI print.  In the US, there’s the Q1 Employment Cost Index (a repeat of 0.7% quarterly growth tipped), the Chicago PMI ahead of the ISM tomorrow night and the Conference Board’s Consumer Confidence for April and what it says about the labour market from its ahead of payrolls on Friday (ADP Employment Wednesday).  There’s US Pending Home Sales and US CoreLogic House prices too tonight. The Dallas Fed’s Manufacturing Survey for April released overnight was on the soft side, as most regionals so far have been ahead of Chicago’s tonight and the national ISM.

Market prices

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