Below trend growth to continue
Central banks are again in the spotlight this week.
After last week’s ECB and RBNZ policy announcements, central banks are again in the spotlight this week with the BoJ today (see more details below), the Fed Thursday morning and the BoE later the same day. In contrast to the ECB last week, expectations for any policy change this week are pretty low, that said the market will be watching for any hints about the next policy move while at the same time central bankers will be closely watching the market reaction to their moves. The BoJ will probably be concern about the market’s response to any clues of further negative deposit rate cuts while the Fed will be conscious of emphasising the need to tighten, but only gradually. This message will need to be balanced against the “Dot plot” of Fed members’ projected funds rate. Historically these projections have proven to be too aggressive. In December officials projected another four rate increases in 2016, in today’s environment that looks way too aggressive.
The somewhat delayed market uplift from the ECB stimulus last week has now turned into a more cautiously optimistic mode. Asia and European equity markets extended their Friday night gains, but US stocks have traded in and out of positive territory, reflecting a more hesitant mood. Gains in US consumer companies have been offset by losses in financial and energy stocks as oil prices fell following comments from Iran over the weekend that it won’t freeze production until production climbs to 4m b/d.
This cautious mode has also been reflected in currencies with the safe haven JPY the only (small) outperformer against the USD. G10 commodity related currencies are at the bottom of the leader board, with NZD the biggest looser, down -1.21% . The NZD is currently trading at 0.6664 and our BNZ strategist notes that the currency may gain some respite overnight if the latest GDT dairy auction holds up as they suspect. BNZ is looking for a flat to small positive result for the overall price index.
Core global bond yields had a quiet, but mixed night. In Europe, 10y bunds yields managed to climb 1bps to 0.278% while 10y Gilts ended the day -2.4bps at 1.549%. Relative to Sydney’s closing level, 10y US Treasuries yields are about 1bps lower at 1.966%, after having traded to an overnight low of 1.939%, following the move lower in oil prices.
WTI Oil has ended the day -3.2% and Brent is -2.1%. In other commodities, iron ore lost another 2.7% closing at $55.6, Copper gained 1.7$ and gold lost 2.3% and is currently trading at $1230.3.
In other news, Putin has ordered Russian forces out of Syria noting that now it’s time to focus on peace talks.
In Australia this morning at 9:30am the weekly consumer confidence reading is released and two hours later we get February motor vehicle sales along with the minutes of the RBA’s March Board meeting. As for the minutes, any reference to the AUD will be closely watched. The AUD/USD is now back above 75c and it is becoming a bit of a discomfort to the Bank, (Deputy Governor Lowe implied as much last week), however fourteen days ago, when the RBA last met, the AUD/USD was trading with a 71 handle and at that level we suspect the board’s level of discomfort was probably on the low side. Punters will also be looking for any hints on whether the slight change in wording to the easing bias in the Statement (“may” to “would”) reflected anymore likelihood of a near-term rate cut.
The BoJ concludes its two day meeting today and our expectation is for the Bank to stand pat. While recent economic data releases have been weaker than expected Japan labour market has remained resilient. In our view, this later factor along with a more stable global backdrop affords the BoJ time and the chance to sit on its hand today. We also know the BoJ would prefer to have more time to assess and fully implement its negative interest rate policy. Nevertheless, the fight against deflation is not over and the lack of progress in the ‘shunto’ wage negotiations tells us that the BoJ will be forced to ease in April. The latest Bloomberg survey shows only five of 40 forecasters anticipate a policy change this month. Note Governor Kuroda is scheduled to speak post the policy announcement.
Later today in Europe we get Q4 employment figures and in the US we get February Retail Sales along with PPI (Feb), Empire State Survey (Mar) ,NAHB housing market index (Mar), business inventories (Jan) and portfolio TIC data (Jan). Gasoline prices fell sharply in February and it is seen as the major factor for the soft numbers expected for retail sales (-0.1% v.s 0.2% prev) and PPI (-0.2% exp v.s 0.1% prev). The Empire state survey provides the first glance into the estate of the US manufacturing sector in March. Economists polled by Bloomberg expect a slight improvement in the headline to -10.0 in March from -16.6 during February.
On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -1.94bp to 1.96%. On commodity markets, Brent crude oil -1.96% to $39.6, gold-2.0% to $1,235, iron ore -2.7% to $55.55. AUD is at 0.7508 and the range was 0.7492 to 0.7594.
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