Markets Today: What Chinese slowdown?

China delivered some more positive results in the last 24 hours.

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Today’s podcast

Overview: Good morning good morning

  • AUD again fails to break above 0.72 ahead of today’s local unemployment report
  • Better than expected US trade for February added some support to the USD overnight
  • US equities struggling to make it into “gain” territory; held back by healthcare stocks
  • Fed’s Beige book very beige; still no wage/inflation alarm bells despite a still tight labour market; moderate growth reported
  • Low global inflation picture still playing out: NZ yesterday, then UK, EZ, though Canadian core rates ticked a tad higher
  • Along with today’s Labour Force report comes the NAB quarterly Business Survey, notably with its forward looking measures for employment and business investment
  • US Retail Sales tonight along with jobless claims

It’s again been a night of measured price action, equities higher in Europe, a mixed report across the US main boards, held back by lagging healthcare stocks amid talk in Washington about expanding Medicare.  Across some of the reporting companies, Bank NY Mellon has taken a large hit after their results, Morgan Stanley is higher, as is PepsiCo.  US Treasury yields are almost unchanged for the session.  Among commodities, WTI is down 0.48%, copper is up 0.94%, while iron ore was down yesterday after the Brazilian authorities gave the green light to Vale to open one of its closed mines after the dam wall failures.  Dalian iron ore futures were down 1.6% yesterday.  Gold is little changed.

In FX land, it was a night of two parts in the limited price action seen, and certainly as far as the Aussie was concerned.  Yesterday’s better than expected Chinese growth numbers – especially the large “overs” in industrial production with industrial production growth up to 8.5% (against 5.6% expected) saw AUD buyers re-emerge, again testing 0.72.  But again, it’s failed to push on overnight.

This time it was softened by a better than expected US goods and services trade deficit that came in at $49.4bn against $53.4bn expected and also lower than last month’s $51.1bn shortfall.  Notwithstanding support from higher aircraft exports (and some clouds over that), the report also revealed a smaller deficit with China for the opening two months of the year.

As a result of the lower trade deficit, the Atlanta Fed nudged up their estimate of GDPNow to 2.4% from 2.3%, raising their concurrent estimate of the net exports contribution to GDP growth from 0.2% pts to 0.5% pts.  The partial offset came from a downgrade to non-residential fixed imports suggested by the US imports data.

The AUD is now been parked back around 0.7175 territory ahead of today’s further instalment on the health of the Australian labour market where NAB looks for better than expected employment, softened by a tick up in the unemployment rate.  (See below for more detail on this.)

Other mainboard G10 currencies have been steady to lower against the USD, though the pull-back in Aussie and Kiwi have been the more notable, dips in the other on net marginal at most.

There was a small intra-day exception with some renewed support for the CAD after its March CPI report revealed higher than expected readings on two of its three core measures of inflation, but this move was short-lived and modest, overtaken by renewed support for the USD.

Following yesterday’s lower than expected NZ CPI (with steady to lower core factor model rates), UK core inflation was a tenth lower than expected at 1.8% while EZ core CPI was steady as expected at 0.8%. 

Elsewhere, the Fed’s Beige Book described the US economy as performing at a ”slight to moderate” rate of expansion in March and early April.  Businesses reported sluggish sales conditions for general retailers and auto dealers (tonight’s US Retail Sales will be pertinent), favourable tourism and also manufacturing, if laced with trade worries.

The US labour market was described as still tight with shortages of skills, but still no generalised wage pressures, while the ability of firms to pass on increased input costs to consumers as mixed.  Business reported tariffs, freight costs, and rising wages as factors behind input costs increasing in the “modest-to-moderate” range.  Most Districts reported stronger home sales.

The German Government revised down their forecast of German economic growth for this year to just 0.5%, down from 2.1% a year ago, the underperformance ascribed to auto emission standards, trade tensions, and the low level of the Rhine.  With the Chinese economy again revealing a pick up, it’ll be interesting to see how this plays out for the export-exposed German economy.  Positively, you’d expect.

Coming up 

  • It’s all about employment today: risks, read throughs, and forewarnings.  NAB’s employment forecast is for stronger than expected headline employment growth that should, initially, be AUD supportive, though some of that gloss might be dulled by a tick back up in the unemployment rate by a tenth.  Net net the report should likely be a positive for the AUD and yields, especially with the market half-sensitised to whether downside economy risks might somehow flow through into the monthly labour force survey.  If that does, watch out.
  • NAB’s forecast is for employment to print at 25K (market 15K), admittedly at least partial payback after last month’s low +4.6K growth, but also from the continued pretty healthy monthly trend growth in employment that was 20K in February.  Likewise, the March reading of the NAB Employment index ticked up to 7 from 5, and was consistent with 20K on-going near term monthly employment growth.  While Job Ads growth has pulled back (SEEK this morning reported a 4.6% y/y decline for March; the level still remains high), the ABS Job Vacancies report for February showed the Vacancy levels still at a record high and also relative to the size of the workforce.  Also, NAB’s in-house employment indicator also points to the likelihood of a fairly healthy bounce in March.
  • Labour Force statistical health warning:  Some particular points of caution about this particular report.  First, it’ll have incorporated the annual major seasonal re-analysis that can re-shape the recent picture somewhat in terms of month-to-month growth, but unlikely to change the trend too much.  (Famous last words?)  Second, because of the Townsville floods, that region was not sampled in February but “estimated”. Renewed measurements for March are of likely consequence for the national picture but could tilt the Queensland picture a little.  (Townsville is around 1% of national employment and 4% of Queensland’s.)
  • The report is of course important for the RBA.  The RBA will be looking to assess whether today’s report is confirmation of their current view of a still relatively healthy labour market.  Our forecasts for today suggest so.  After today’s employment report, the market will be focusses on next week’s local CPI, NAB expecting core rates of 0.4% for Trimmed mean and 0.3% of Weighted Median, testing the patience of the RBA.
  • NAB Business Survey for Q1:  This contains larger sample estimates of Conditions and Confidence but also forward-looking expectations for employment and business investment.  The 12 month ahead reading for employment in Q4 was a still healthy 20 (if then off 3 points that quarter), while the Capex plans 12 month outlook was 25 (also down 3), still high.  The Survey then was pointing to ongoing strength in the labour market, even with some slowing in growth.  Firms were then facing continued difficulty in sourcing suitable labour.
  • Eurozone preliminary PMIs for April are out tonight, the market looking for almost steady and thus soggy readings for the Manufacturing PMIs.  We wonder whether China’s growth resilience could show up in the likes of German and EZ manufacturing orders?  German factory orders were particularly weak in February. These PMIs are for April.
  • US Retail sales, Philly Fed and an update from that sub 200k US jobless claims print tonight.  The market looks for ex auto and gas retail sales to rise 0.4% after a 0.6% decline in February.  Keep an eye out for revisions too; Feb sales were soft, but Jan sales results were revised up in size by around ½%.

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