Below trend growth to continue
US equities ended day up between 0.5% and 0.65% with energy stocks leading the way on the back of gains in oil prices.
In a cautiously optimistic speech, Fed Chair Yellen said that she still sees the need for a gradual policy tightening, but walked away from her previous timing guidance that a rate increase would be appropriate over coming months. Yellen acknowledged the softness of the May report, but also noted that ‘one should never attach too much significance to any single monthly report’, adding that “I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones”.
Yellen speech did not elicit a big market reaction, but helped settle the mood following the big moves seen post payrolls on Friday. US equities ended day up between 0.5% and 0.65% with energy stocks leading the way on the back of gains in oil prices. Brent climbed +1.5% and WTI rose by 1.8% boosted by reports of a fall in Nigeria’s production with rebel groups threatening further disruption.
In currencies the USD had a mixed night with the smart trade over the past 24hrs being long CAD/JPY, up a cool 1.78%. CAD benefited the most from the moves in oil prices, gaining 0.95% against the USD while JPY fell back (-0.83%) as stocks rallied. The AUD is little changed at 0.7368 and the NZD is a bit lower at 0.6929, down 0.42%.GBP had another volatile session with the latest ICM poll showing 48% of Britons would vote to leave vs 43% to stay. Cable fell to an overnight low of 1.4365, but it recovered some ground pre Yellen to finish the day at 1.4455.
Core global yields unwound some of their post payrolls gains. In Europe, 10y Bunds climbed 1.8bps to 0.08% while 10y Gilts edged 0.5bps higher to 1.278%. The US treasury curve bear steepened with 10Y UST climbing 3bps to 1.738% while 2y UST climbed 1.9bps to 0.793%
Looking at other commodities, gold is unchanged at $1244.2, iron ore ended climbed 2.1% to $51.1 and the CRB index is up 1.4%.
As for data releases, unsurprisingly the Fed’s labor market conditions index fell by 4.8% in May and April was revised to -3.4% from -0.9%.
Fed Lockhart and Rosengren were also on the wires ahead of Yellen and their comments were fairly similar. Lockhart noted that the May’s job report and Brexit justify patience . He also said that growth remains moderate and we need to see how the data looks after Brexit. In a similar vein, Fed Rosengren noted that how quickly the Fed hikes depends partly on whether last week’s dismal non-farm payrolls report was an ‘anomaly’. Rosengrenn (dove voter) still expects enough growth to justify gradual hikes.
It’s all about the RBA Board meeting today, not so much about the outcome that looks to be less up in the air as a highly likely “no change”, but all about the words in Glenn Stevens 3rd last Media Release on behalf of the Board.
Given the stronger than expected AU GDP print from last week and signs that the housing markets have not lost too much of their mojo since the May rate cut, we think the Bank is in no rush to ease again. In fact, on the bias, we would be surprised if the Bank deviated too much from the final paragraph of the May statement:
“The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time.”
This may well be supplemented by the addition of the question the Board has been considering for many meetings now in this low rate environment: whether prospects for sustainable growth in the economy and inflation returning to target over time would be improved by further easing of monetary policy.
As far as the exchange rate is concerned, and the potential for it to complicate either the transition of the economy and/or the inflation outlook, the AUD/USD is still about 4½% lower than the pre-May RBA Board level or 2¾% on a trade-weighted basis. It’s still something to have on the watch list but no increased anxiety or downside risk to growth and inflation at this point.
Before the RBA, we also have NZ wholesale trade (8.45 AEST) and then at 9.30 the AU AiG PCI Construction index (L: 50.8) and weekly ANZ-Roy Morgan consumer confidence (L: 113.2; -2.2%). China prints its may foreign reserves and in the northern hemisphere, Germany prints its April industrial production, the EZ gets its revised Q1 GDP number and on the other side of the Atlantic the US releases final Q1 readings of unit labour costs and productivity along with April consumer credit. Lastly the IVEY Manufacturing PMI(May) is due out in Canada
On global stock markets, the S&P 500 was +0.49%. Bond markets saw US 10-years +3.63bp to 1.74%. In commodities, Brent crude oil +1.36% to $50.52, gold+0.0% to $1,245, iron ore +2.1% to $51.11. AUD is at 0.7366 and the range since yesterday 5pm Sydney time is 0.7335 to 0.7379.
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