Market volatility remains suppressed in the lead-up to Easter. Of note though, US Treasury rates continue to trend higher and the 10-year rate is now back to levels preceding the last Fed meeting. AUD has recovered yesterday’s losses to trade flat, while the NZD remains flat.
The US 10-year rate is up 4bps for the day to 2.59%, taking its gains for the month to nearly 20bps. This takes the rate back to the level preceding the late-March FOMC meeting, where the Fed removed from its projection any further Fed Funds rate increase this year, a dovish surprise. Over the last couple of weeks, we’ve seen the market price out a lot of the easing in rates in the Fed Funds futures curve. The market seems to be less concerned about the global backdrop, with indicative signs that global growth momentum might be at an inflexion point. In that regard, China’s data dump this afternoon of a number of key activity indicators will be closely monitored for some signs of “green shoots”, following easier monetary and fiscal policy.
US data released overnight was mixed. US home builder sentiment rose to a 6-month high, as expected, supporting the view that lower mortgage rates and strong income are driving improved demand. Industrial production was on the soft side, with a flat manufacturing sector amidst weaker global economic conditions.
Currency markets remain lacklustre. The AUD weakened yesterday after the RBA minutes clearly identified an easing bias. The markets fixated on the comment that MPC members agreed there was a low chance of a need for higher rates, but if inflation did not move any higher and unemployment trended up, then a decrease in the cash rate would likely be appropriate. This saw a modest fall in Australian rates and the AUD slipped 30pips to 0.7140, before finding support. The AUD has recovered overnight back to around 0.7175, making it flat for the day, helped by respected journalist Terry McGrann, a close RBA-watcher, reporting that “despite the headlines, there’s no rate cut imminent”.
The NZD fell in sympathy with the AUD yesterday but is now back on an even keel and trades close to 0.6760, flat for the day and well-contained within a 30pip trading range. Overnight, the GDT dairy auction price index rose by 0.5%, in the range of expectations, marking a tenth consecutive increase and taking cumulative gains since November to around 28%. Within the mix, whole milk prices fell by 0.7%, but this was offset by gains in butter and cheddar. We expect that dairy prices are getting close to a peak here, with a possible pullback over coming months as EU spring milk production comes through.
The focus today turns to NZ Q1 CPI data this morning, following the RBNZ’s recent pivot to an easing bias. The balance of risk is that headline inflation comes in higher than the RBNZ’s February MPS estimate of 0.2% q/q and 1.6% y/y. Non-tradeables inflation could also come in stronger than the RBNZ’s 2.8% y/y and is likely to hit a 5-year high. Alongside the US trend noted above, the market has been pulling in its horns, reducing the amount of easing priced into the curve. There was a slight downside bias to NZ rates yesterday, following the move in Australia, and today’s CPI data will determine where we end up today, with the US move overnight initiating a slight upside bias.
GBP has been on the soft side, down 0.4% to 1.3050. The Guardian reported that talks between PM May and Labour’s Corbyn have stalled. Labour is in favour of a custom union, but the Conservatives remain against this proposal as it shuts off the possibility of doing other trade deals. UK labour market data were in line with expectations, with strong jobs growth keeping the unemployment rate at 3.9%, its lowest rate since 1975, and real wages growth remaining strong. If not for the uncertainty around Brexit, the Bank of England would likely be ramping up interest rates.
EUR is also a touch weaker. Reuters reported that a 'significant minority' of ECB policymakers have doubts about Europe's ability to rebound. Reportedly they think there are shifting consumption habits such as a move away from diesel cars, weak Chinese demand and that trade wars now look "to be the norm" rather than the exception. Some think the ECB's forecasting methodology may need to be reviewed since projections are persistently too optimistic and are regularly cut quarter after quarter. Overall, this is a pretty weak assessment of a minority at the ECB. Bloomberg reported that ECB officials lack enthusiasm for the tiering of its deposit rate tool and some doubt it will actually happen, seeing little merit in the proposal.
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