Below trend growth to continue
There is a nervous tinge to the commentary overnight, but market moves have been relatively light, and the same is expected for today. Equities are modestly higher in the US and Europe, yields are lower generally, while the USD outperformed.
There is a nervous tinge to the commentary overnight, but market moves have been relatively light, and the same is expected for today. Equities are modestly higher in the US and Europe, yields are lower generally, while the USD outperformed. Commodity prices are mixed, but iron ore in particular was 2% lower. The AUD is marginally softer.
The ongoing events in Greece were the major source of overnight news. There hasn’t been anything particularly new, and that remains the problem. Ongoing declarations from both sides that they need concessions from the other, further suggests that no resolution is forthcoming this week. As we go into the end of the month (when the debt is due) there is likely to be a rise in tension. Although, the degree of complacency in either a) a deal will come at the last minute or b) the EU is better off without Greece, is suggestive of little market movement ahead of these events.
GBP outperformed overnight, with the release of the inflation numbers. That showed that the move into deflation was very short lived. EUR underperformed, maybe on Greece but that worry is also affecting the numbers. The German ZEW business survey dropped more than expected. In the US, the housing numbers remain volatile, but the higher than expected forward indicator, housing permits, were up strongly, while housing starts disappointed. Overall, the outlook for housing is expected to be positive.
The RBA minutes yesterday didn’t add to the market’s outlook for the RBA; remaining of the view that if the situation deteriorates then there will be further easing, but that isn’t necessary at present.
It is most likely to be a quiet day, as markets hunker down ahead of the Fed meeting. There is little of interest on the domestic calendar. That should leave our markets looking ahead, given the event risk, rather than behind.
The NZ current account data may have a local impact, but as it has been superseded by the April trade numbers, the moves should not be large. Similarly, for Japan, as there has been an improvement in the deficit, the market is paying far less attention to this trade data.
The BoE minutes are released, but nothing new is expected and the big Greek meetings are tomorrow; leaving markets free to wait for the Fed.
The FOMC are not expected to change policy at this meeting, but with the US data having improved substantially of late, speculation is increasing that the move to raise rates might be September, rather than December. Markets are not fully priced for September, but pricing around a 50% chance of a 25bp move in September and are fully priced for December. Indications for September would be USD positive, a delay, negative. But it isn’t likely to be as simple as that.
Every nuance is likely to be parsed in minute detail. This meeting also sees the press conference from Yellen, new dot points of Fed member forecasts for the fed funds rate, and updated forecasts. The dot points should get a lot of attention, as the 2015 ones at the last release (March) showed two hikes this year; that might be lower, it would be a surprise if it were not.
There will be a lot to chew over, but it is possible that we will still be left to watch the data.
The decision to raise interest rates, after they have been on hold for a prolonged period, is likely a tough one. The labour market and inflation criteria must be right, and that intangible “sentiment,” particularly now, also needs to be right. With a globally integrated world, a rise in US rates (or prospect of the same) has been known to be a cause for concern – the advent of the 2012 ‘taper tantrum’ was an example of that. So, it is softly, softly. The lift-off is important, in that it is a signalling device, but the Fed no doubt wants us to remember that yields (at least at the front end) are still very, very low. But if there is concern that the Fed is behind the curve, or fuelling inflation, longer dated yields rise. It’s a delicate balance and one they need to convey in a short statement, forecasts and some dots. It’s perhaps not surprising that these meetings create FX volatility.
On global stock markets, the S&P 500 was +0.60%. Bond markets saw US 10-years -4.30bp to 2.31%. On commodity markets, Brent crude oil -0.31% to $63.75, gold-0.4% to $1,181, iron ore -2.1% to $62.91. AUD is at 0.7745 and the range was 0.7722 to 0.7781. (For more market prices, please see p.2 of the pdf).
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