It has been a quiet start to an action-packed week, with modest movements in equities, bonds and currency markets. The NZD is hovering near the 0.65 mark, while the AUD has slipped overnight to 0.6850.
Markets are in a holding pattern, with focus firmly directed towards the Fed’s policy update on Thursday morning NZ time. Ahead of that meeting, Citigroup’s US economic surprise index remains deep in negative territory as the run of economic data remains below expectations. Overnight, the New York Fed’s Empire State manufacturing survey was released and the headline index fell by a record 26.4 points to minus 8.6, well below expectations, but the result looks to have been severely impacted by the timing of the survey – just after Trump threatened to impose tariffs on all goods from Mexico. The NAHB’s homebuilders’ sentiment index was also below expectations and went against the positive trend of other housing indicators, with rising costs and trade issues noted in the comments.
Commerce Secretary Ross downplayed the prospect of a major trade deal emerging from a possible meeting between President Trump and President Xi Jinping at the G20 summit at the end of this month, with the most that will come out “might be an agreement to actively resume talks”. Public hearings in Washington are due this week on the proposed increase in tariffs on the remainder of goods imports from China, where hundreds of companies and industry groups are expected to fight against the move and plead for an exemption for particular goods.
Currency movements have been modest to begin the week. NZ’s performance of services index rose in May, which came as a relief following last week’s soft manufacturing PMI, although the trend remains firmly downward. Still, the lack of another lurch down paved the way for a slight recovery in the NZD after last week’s beating. It reached as high as 0.6515 last night but has since retreated to just below the 0.65 mark. The AUD began to drift lower after the NZ close and touched 0.6850 overnight, where it is now finding some support. So NZD/AUD is up 0.3% to 0.9480. GBP is also on the soft side of the ledger, down 0.4% to 1.2540, ahead of the next round of voting to determine the new PM. Boris Johnson remains the man to beat, with the real battle being who will be the other candidate to face him in the head-to-head vote that goes out to the Conservative party membership.
EUR is flat around 1.1220. Ahead of the ECB’s big conference in Portugal a couple of members, Coeure and Hernandez de Cos were on the wires, offering a downbeat assessment about the outlook for growth and inflation. Hernandez de Cos reiterated that the ECB is ready to use other tools, including rate cuts, to boost inflation and growth. Coeure said that the signals from financial markets are “quite alarming” and the ECB was talking about “contingency planning”.
There’s not much to say about the rates market. The US 10-year Treasury rate has traded a 2.075-2.115% range to be little changed for the day at 2.08%. The 2-year rate is up 2bps to 1.86%. There is some concern by traders that the Fed will deliver a hawkish surprise this week. Obviously, the Fed will not meet the very dovish market expectations that currently see nearly four full rate cuts priced into the curve through to the end of next year. But a move in a more dovish direction might be enough of a carrot to contain the USD and the rates market reaction on the day. NZ rates were little changed yesterday, remaining near record lows.
In the day ahead, there are only second tier releases which shouldn’t cause much market reaction, so we could well be in a holding pattern for at least another day. Indicators point to a weak GDT dairy auction, with the price index expected to fall in the order of 4%, reinforcing the caution we’ve long had about the 2019/20 milk price.
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