A further slowing in growth
Astute readers (and listeners to our early morning podcast) will note Empire of the Sun’s Walking on a dream was one of our first song titles for 2017. That title was prompted by a lack of detail around Trump’s policies ahead of inauguration day which led markets to ask “is it real”?
Today presents a possible redux with markets expected to watch closely Trump’s joint address to Congress (1.00pm AEDT) to see whether legs are starting to develop on his visionary statements of increased infrastructure spending (“Big time” “1 Trillion”) and Tax (“Phenomenal”). Overnight moves suggest markets have already judged that Trump will be again long on vision, but short on detail.
The traditional safe haven currencies of the Yen and Swiss Franc were higher overnight – by 0.4% each – and suggestive of a very mild risk-off tone. It’s no surprise then to see the USD dollar (DXY) down 0.1% across to the board. Other currency moves were fairly muted with the Euro up 0.1% and the Pound down 0.3% with Brexit jitters weighing (Nissan said it may need to adjust business based on Brexit – it employees 7,000 in Sunderland). The Aussie was unchanged overnight, though a stronger than expected GDP print this morning could see it retesting the 77c barrier – it currently sits at $0.7672.
Moves in yields were fairly subdued. US Treasury yields fell 1bps to 2.36%, while German Bunds rose 1bps to 0.21%. French OATs were unchanged overnight, but have fallen by around 10 bps to 0.89% over the past couple of days with Eurosceptic Le Pen losing momentum in the polls – betting odds now put Macron at 50% of winning the French Presidency (Le Pen at 34% and Fillion at 24%).
Despite muted yield moves, the probability of a Fed March rate hike rose to 59% according to the OIS market, up from 56% yesterday. There are now 2.3 rate hikes priced for 2017. It appears the market is reacting to recent Fed rhetoric – particularly from hawks such as the Fed’s Kaplan (voter). Kaplan said yesterday morning that raising rates “sooner rather than later means in the near future” while Williams (non-voter) was out as we go to print stating March was getting “serious consideration” and that we’ve reached full employment.
In terms of the economic data, it was mixed. US Q4 GDP remained unrevised at a 1.9% annual rate, below the consensus that was expecting an upgrade to 2.1%. Looking ahead to Q1 2017, the advanced goods trade deficit is likely to drag on GDP growth being worse than expected due to a 2.3% jump in imports resulting in a headline goods deficit of $69.2bn – the highest since March 2015. Nevertheless, looking through the monthly volatility, the trend for GDP is sitting at around 2% which has still been strong enough to bring the unemployment rate down and keep printing payrolls at around 200k.
Speaking of GDP, Trump said in an interview overnight that his plan to increase military spending by $US54bn will come from a “revved up economy…we were probably GDP of a little more than 1% and if I can get that up to 3 or maybe more, we have a whole different ball game”. Last night’s GDP figures suggest he may struggle. Trump also said he was not going to touch Social Security in expected budget cuts – implying the axe will fall on other programs. Underlying the political uncertainty continues to bubble away with Trump accusing Obama of being behind anti-Trump protests “I think that President Obama’s behind it”.
Equity moves were also fairly muted with the S&P500 down 0.2% while the EuroStoxx was up 0.3%. Commodity moves were also muted with Brent up 0.1% to $56.47. Australia’s major commodity exports were also marginally unchanged except Iron ore which fell 1.1%.
Domestic focus will be on Australia’s Q4 GDP figures. The market consensus looks for a 0.8% q/q increase. NAB is expecting a slightly stronger print at 0.9% q/q with upside risk. A mechanical calculation of the partial data to date on the expenditure-side could produce a GDP(E) print as high as 1.2% q/q, so risks are tilted to the upside with a further kick from the farm sector possible after a bumper grain harvest. We await 11.30am AEDT.
Focus then turns to China with the official PMIs at 12.00pm AEDT (manufacturing likely close to consensus at 51.2) and then to President Trump’s joint address to Congress (1.00pm AEDT). Treasury Secretary Mnuchin said earlier that Trump was likely to be “touching on tax reform” as part of the speech, but to your scribe it is hard to see how a speech will provide specifics in terms of how infrastructure and tax cuts are funded. A lack of detail could see scepticism build — something that bond and currency markets have become in recent weeks.
While focus in the US has been on politics, economic data continues to be strong. Tonight we get the Manufacturing ISM and PCE Deflators. On the ISM, a number of regional indicators have surged in recent days and suggestive of upward risks to the market consensus of 56.2. Core PCE is expected to increase 0.3% m/m which would take the annual increase to 1.7%, while the Headline PCE is expected to be at 2.0% y/y – at the Fed’s target. The Fed also releases its Beige Book while Canada has its latest rates decision (likely firm hold).
On global stock markets, the S&P 500 was -0.24%. Bond markets saw US 10-years -1.78bp to 2.36%. In commodities, Brent crude oil +0.09% to $56.47, gold-0.6% to $1,251, iron ore -1.1% to $91.27, steam coal -0.1% to $83.45, met.coal +0.1% to $162.34. AUD is at 0.7667 and the range since yesterday 5pm Sydney time is 0.7666 to 0.7695.
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