A further slowing in growth
It’s all been about the FOMC and weakness in the AUD over the past 24 hours.
It was just words, the statement, from the FOMC this morning, the FOMC leaving the Fed funds rate unchanged at 0.75-1.00% and not changing their guidance on when they might begin to run down their balance sheet. (You can read the statement here.) There were no updated forecasts at this meeting. That comes next in at the June 15 meeting. While there was also no press conference from Chair Yellen, she will have the opportunity to spell out the Fed’s views on the economy when she speaks at Brown University on Friday. You’d only expect a similar upbeat message from her tomorrow.
The words from the Fed were not vague at all, leaving no doubts in the mind of the market that the Fed retains a positive outlook for the US economy and will press on with their gradual removal of policy accommodation. The clear message from the statement is that the Fed remains upbeat on US economic prospects. They are looking through first quarter weakness, including the softness in consumer spending as “transitory”. The statement highlighted the favourable backdrop for consumer spending even though it recognised that household spending had risen “only modestly”. The Fed of course like others is also aware that first quarter growth numbers have consistently low-balled over the past decade, only to rebound in the second quarter, the residual seasonality. The backdrop for consumers and the economy gets a meaty update tomorrow night from payrolls, both in terms of employment growth and hourly earnings that also feeds back into inflation expectations. The Fed statement described job gains in recent months as having been solid on average and continued to describe the economic outlook as roughly balanced.
The USD has been stronger in the wake of the FOMC, stocks have been relatively steady and US Treasury yields higher. The market is now pricing in an 80% chance of a hike at the June 15 meeting (which has been and remains the NAB’s forecast). 40 bps is priced by the December 13 FOMC. The US 10 year Treasury yield sits this morning at 2.318%, up 3.8bps. NAB forecasts another hike this year after June and a 0.70 cent AUD by year end.
The big dollar has made gains against all the majors. Sitting this morning with the largest hit is the AUD that’s off the best part of 1½% in the past 24 hours, having been sold down through Asia and the London session, base metals lower overnight, LME copper down 3½%. Iron ore however has been virtually steady, though it’s been a lighter week in China for holidays.
The AUD this morning sits back at 0.7420/25, the USD DXY index up 0.40%, while the Bloomberg spot dollar index is up a similar 0.36%, testimony to the big dollar strength. Also helping the US$ was a stronger-than-expected ISM Non-Manufacturing index for April. It was 57.5, up from 55.2 (E: 55.8), most metrics higher (including new orders and prices paid), the employment component virtually steady. Across the Atlantic, Eurozone Q1 GDP came in exactly on expectations at 0.5%/1.7% after 0.5/1.8% in Q4 with little market spin off. The big Macron-Le Pen TV debate has been going on as we go to press, seemingly with no politically killing blows landed by either combatant.
For the USD, tomorrow night is looming large with both the jobs report and a speech from Fed Chair Yellen, speaking at Brown University, her alma mater, speaking to a 125 Years of Women at Brown Conference. (Yellen speaks five hours after payrolls; see our calendar for times.)There’s also a bevy of other Fed speakers, including Stanley Fischer, John Williams, Rosengren, Evans and Bullard, all speaking before the market closes in New York, apart from a second speech from Williams.
Today, RBA Governor Lowe is speaking to the Australian Business Economists’ Queensland lunch today on “Household Debt, Housing Prices and Resilience”, his opportunity to cover this most relevant of policy topics. It’s scheduled to start at 1.10pm AEST. China has its Caixin Services/Composite PMIs (L: 52.1, 52.2) at 11.45.
For Sterling/Euro watchers tonight, there’s a conference on European citizenship over the next three days at a state of the union conference. EC President Juncker, EC President Tusk and arguably more market-sensitive, Chief Brexit negotiator Michael Barnier all speaking, all doing the hard yards in Florence. Barnier is speaking on EU citizen’s rights as a priority for Brexit negotiations. More speaking aloud about Brexit divorce bills (apparently it’s now €100bn) and that trade not be negotiated until the divorce arrangements are settled. PM May is accusing “some in Brussels” of meddling in the UK election. It’s all getting very serious.
Tonight also sees the final April estimates for Service and Composite PMIs for the Eurozone and member economies. They are not usually revised much, if at all. The full US trade report for March (this one also includes services) might get a little attention, as might factory orders, jobless claims. More likely, the market will be looking for any chinks in Mr. Draghi’s downside risk outlook when he speaks in Switzerland. BoC Governor Poloz is also speaking.
On global stock markets, the S&P 500 was -0.13%. Bond markets saw US 10-years +3.77bp to 2.32%. In commodities, Brent crude oil +0.08% to $50.5, gold-1.5% to $1,239, iron ore -0.1% to $68.68, steam coal -1.3% to $78.00, met. coal -5.3% to $180.00. AUD is at 0.7421 and the range since yesterday 5pm Sydney time is 0.742 to 0.7546.
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