The first day of the month kicked off with some positive US economic news and higher oil prices that have lifted the USD, UST yields and US equities.
US equities have probed fresh highs, with the S&P500 index currently up 0.6%, supported by generally positive newsflow – auto sales reported from a number of US car makers beat estimates; oil prices have recovered a little after US data showed a decent fall in crude inventories; ADP employment growth was stronger than expected; and the ISM manufacturing index was in line at a healthy level, with the detail showing stronger new orders and employment components.
Meanwhile FOMC members haven’t deviated from the firmer monetary policy script. Yesterday, the Fed’s Williams played down anxiety over recent weakness in US inflation and suggested that an improving economy warranted “three or four rate increases” this year. In an overnight speech, Fed Governor Powell also shrugged off recent weakness in inflation and said “if the economy performs about as expected, I would view it as appropriate to continue to gradually raise rates”, noting in a separate interview that he could see the Fed raising rates “a couple of more times” this year if the economy performs as policy makers expect. He did soften the outlook on rates a little though by commenting “it is important that the Committee assess incoming inflation data carefully”.
All this news has boosted the USD, which is higher against all the majors and the index up 0.3%. This sees the NZD peel off the 0.71 mark and sit a little lower at 0.7065. There has been some drag from a weak AUD, which sits at the bottom of the leaderboard, down 0.7% to 0.7380. Yesterday, there was a brief spike up on a strong retail sales report, but the accompanying capex report was soft and soon after a surprising sub-50 reading on the China Caixin PMI sent the AUD lower. Throw in another near-2% fall in iron ore prices and growing expectations that Q1 and/or Q2 GDP Australian growth could come in negative, and the makings of a depreciating AUD are there. On a TWI basis the AUD has fallen by about 6% over the past ten weeks. NZD/AUD has pushed up to fresh multi-month highs and currently sits at 0.9570.
The stronger USD has dragged down the EUR back towards 1.12. The German contingent of the ECB Board is calling for a change in policy guidance. Bundesbank President Weidmann said that the ECB is starting to debate whether to reflect the euro area’s improving economic prospects in its policy guidance. Board member Lautenschlaeger added that “when the situation changes in a clear and not just temporary way, then forward guidance should also change”. These comments follow President Draghi’s view last week where he tried to hose down expectations of an imminent change in policy guidance. The market is siding with the Germans. In a Reuters survey a large majority expect the ECB to drop reference to lower rates and raise the balance of risks on growth to balanced from negative at next week’s meeting.
GBP’s correlation with election poll surveys has reduced and the currency sits fairly flat for the day at 1.2880. USD/JPY is up 0.5% 111.35. Meanwhile, China continues to intervene to drive its currency higher and delink it from the USD. At the end of last week the PBoC changed its yuan fixing formula to make it less affected by market pressures and give the PBoC more control, shifting further away from its aim of creating a freely-floating currency.
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