A slow end to 2023
As a BBC commentator described it this morning, providing it doesn’t violate the laws of thermodynamics, anything can happen inside the British Conservative Party.
As a BBC commentator described it this morning, providing it doesn’t violate the laws of thermodynamics, anything can happen inside the British Conservative Party. When the former Mayor of London fronted his press conference overnight, it was a real shock when he said the leader would be “someone other than me”! Nominations for the leadership were subsequently announced and Theresa May looks to be a front runner. The Pound slumped but has recovered half its lost ground.
S&P cut the EU’s rating from AA+/Negative to AA/Stable, the agency noting Brexit would hurt the EU’s flexibility, also highlighting the EU’s cohesion risks. Fitch offered warnings and stern words but no immediate ratings changes.
Despite these further hits to sentiment, equity markets have closed higher on both sides of the Atlantic, the S&P 500 VIX index down further to 15.86 (- 0.76) and the AUD at 0.7455.
The reason: the prospect of stimulus to support growth and the markets, from the BoE (and maybe the ECB too). BoE Governor Mark Carney spoke and said that the Bank had been preparing for Brexit risk, is dealing with the uncertainty shock and, more tellingly, signalling to the market the prospect of an easing in the summer. He noted that the MPC would be weighing the downside risks to growth against the upside risks to inflation from the lower exchange rate. His summary was that “in my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”. (He had warned before the referendum they might have to hike in the event of Brexit.) The July 14 MPC meeting is now looking potentially “live”, though our UK colleagues think a cut might wait for the full economic forecast review and Inflation Report for presentation at the August meeting. You can add to that reports the ECB was said to be weighing looser QE bond-buying rules.
US data was inconsequential with still low weekly jobless claims (up from 258K to 268K); the Chicago PMI bounced from 49.3 to 56.8. Fed St Louis President James Bullard said that the size of the Brexit shock in global terms is manageable, that the US$ has not risen a lot, and affirming that negative rates are not a likely outcome in the US.
There might be a half glance at the AU AiG PMI Manufacturing Index for June (L: 51.0) at 9.30, but the focus is well and truly on Australia’s two largest trading partners, first Japan data and later this morning, China.
For Japan, it’s a clear focus on inflation and the BoJ Tankan Survey, the CPI coming at 9.30, the Tankan at 9.50. Core ex fresh food and energy inflation in May is expected to come in at 0.6%, down from 0.7%. As for the Tankan, when the March survey was released on April 1, expectations of large manufacturers were then based on an exchange rate for Japanese fiscal year 2016 (year to March 2017) of 117.46. USD/JPY has since averaged 107.97 (and currently trading closer to 100, though that post-dates the survey), so it’d be a surprise if growth expectations were not lowered. The market consensus for large manufacturers is a dip in Q2 to +4 from +6 and no change in the outlook from +3.
After the June month AU CoreLogic RP Data house price report at 10.00, the focus then shifts to Australia’s largest trading partner and the release of the official Manufacturing and Non-manufacturing PMIs at 11.00. The Manufacturing index has been hugging 50 give or take for 18 months now, though it did dip to 49 in February before recovering, presumably thanks to China’s policy reflation. It’s expected to inch lower to 50.0 from 50.1. There’s no survey of the official Non-manufacturing index that was 53.1 in May. The Caixin survey of the Manufacturing PMI is expected to be unchanged at 49.2. To be frank, we are as much interested in the sectoral information under the main surveys with the Steel PMI jumping from a perilous 37.0 just last November to 57.3 in April and 50.9 in May thanks to the revival of China’s property and construction markets.
It’s then that onward to the US ISM Manufacturing index for June along with other offshore PMIs set for release today and tonight. The US ISM Manufacturing index is expected to be steady at 51.3, still struggling to make any further headway after its initial bounce-back from 48.0 in December in the opening months of this year. (Payrolls is next Friday.) Cleveland Fed President Loretta Mester also speaks tonight; she’s a voter on the FOMC this year and her comments indicate she’s a moderate monetary policy hawk. There’s bound to be some laudatory references to the Cavs too.
On global stock markets, the S&P 500 was +1.36%. Bond markets saw US 10-years -4.58bp to 1.47%. In commodities, Brent crude oil -3.00% to $49.78, gold-0.2% to $1,325, iron ore +3.3% to $55.66. AUD is at 0.7448 and the range since yesterday 5pm Sydney time is 0.7389 to 0.7461.
For full analysis, download report:
For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets
© National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.