Below trend growth to continue
Walking on a Dream was the inaugural 2008 hit song by Aussie electropop outfit Empire of the Sun. That seems an apt description of how markets have been since the election of Trump with a dream run for equities and the US dollar all premised on the idea of a Trump fiscal stimulus boosting growth and inflation. Now with inauguration just a week away (20 Jan), markets are asking “is it real”?
Some hint of that was gleaned in Trump’s press conference on Wednesday where he provided little in the way of policy detail besides making remarks on the drug industry, defence contracts, and tweets on US car manufacturers. That saw a rally in US Treasuries and a fall in the US dollar which continued overnight. The US dollar has fallen by around 1.5% since Trump’s press confidence and was down by around 0.5% overnight against all major currencies except the Pound. The Kiwi, Yen and Aussie all outperformed overnight, up by around 0.8-9%, while the Euro rose by 0.4%.
The Pound fell 0.5% overnight moved by continued Brexit jitters with EU officials reiterating the UK cannot “cherry pick” and that any Brexit agreement is necessarily worse off for the UK than EU membership. Adding to those notions, a UK finance lobby group (TheCItyUK) has seemingly pulled back their request for passporting with banks now pushing for “mutual access” – some acknowledgement that full passporting may not be available if PM May does not accept the free movement of people – PM May is scheduled to give a speech on Tuesday on Brexit.
US Treasury yields fell 2.2 bps to be at 2.35%, erasing all of December’s moves but still noticeably higher than the 1.83% level they were prior to the US election. German Bunds fell 1.2 bps to 0.32%, while UK Gilts continue to outperform down 4.8 bps to 1.30% with likely Brexit jitters weighing. Aussie CGS moved largely in line with Treasuries the previous day, down 6.3 bps to 2.67%.
Four Fed speakers did little then add to the consensus of three rate hikes for 2017. Harker (voter) made the most interesting comments. He sees “three modest rate hikes as appropriate” and the timing for the first rate hike will of course depend on a “little more data”. In terms of incorporating Trump’s fiscal stimulus into his forecast, he said he would need to see a solid bill that “looks like it has the support of Congress and the President” and that would have to be balanced against those policies on trade which can also “have a negative effect”.
Harker also made comment on the Fed’s balance sheet and said it should start to be reined in once the Fed Funds rate hits 100bps by stopping reinvestment – note that’s only one to two rate hikes away so expect some debate on this issue in 2017. The US OIS market now prices around a 36% chance of a rate hike by March and prices 2.1 rate hikes for 2017 compared to the Fed’s median dot points of 3.
Also in central bank news, the ECB Minutes revealed some debate around the length of the extension of the bond buying program (two options were presented: 6 months at €80bn or 9 months at €60bn), while a minority of members – termed “a few members” – did not support an extension. That suggests an ongoing debate about the degree of monetary accommodation needed in the Euro area – no doubt to be enhanced with tentative signs of inflation picking up.
Equities overnight were mostly lower. The S&P500 fell 0.2%, with financials underperforming down 0.8%. The Dow’s magic 20,000 mark is gradually getting further away with the Dow also down 0.4%. European equities were also lower with EuroStoxx down 0.7%.
In commodities, the oil price rose by 1.5-1.7% with the WTI measure at $53.07 a barrel and Brent at $56.07. As for Australia’s major commodities, Iron ore was up 0.7% to $81.0, thermal coal was also up 0.8% to $82.2 a barrel, while coking coal was unchanged at $195 a tonne. The moves lower in the coking coal price over recent weeks should see the Q2 contract price fall from the lofty $285 a tonne it is currently at now.
Friday brings a pick-up in the economic news flow. First up is US Fed Chair Yellen who speaks at 11am AEDT. The Chair’s remarks will be closely watched, but it is also hard to see what more she will add given the plethora of Fed speakers this week.
China releases its Trade Balance which will not only provide an estimate of the pace of demand in China, but also allow analysts to update their estimates of China’s net capital outflows. The market is looking for a surplus of $47.55bn with exports down 4% y/y and imports up 3% y/y in USD terms.
The US quarterly reporting season kicks off for the financials today with JPMorgan Chase, BofA, Wells Fargo and Blackrock all reporting. Financial stocks have rallied hard following Trump’s victory. The US also releases Retail Sales for December, which the market sees as probably having accelerated after the slowing in November. Headline retail sales are expected to rise 0.7% while the core control croup is expected to increase 0.4%, up from 0.1% in November.
On global stock markets, the S&P 500 was -0.23%. Bond markets saw US 10-years -3.81bp to 2.35%. In commodities, Brent crude oil +1.76% to $56.07, gold+0.1% to $1,198, iron ore +0.7% to $80.99, St. Coal +0.8% to $82.15, Met. Coal +0.0% to $195.00. AUD is at 0.7497 and the range since yesterday 5pm Sydney time is 0.7465 to 0.7518.
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