It has been a quiet start to a busy week, with modest price action in currency markets, while US rates have pushed higher.
The S&P500 is up 0.3% and has finally broken up through the record level (intraday) set in September last year, taking the year-to-date rally to 17½%. Newsflow overnight has been minimal.
On the economic front, US personal spending data were released showing the monthly breakdown contained within the quarterly GDP figures released at the end of last week. They showed consumer spending rebounding towards the end of the quarter, which provides a good starting point for the Q2 figures. Inflation data were softer for March, with the core PCE deflator flat and up 1.6% y/y, the lowest rate in over a year. The Fed will likely acknowledge the weaker inflation backdrop in its policy announcement Thursday morning.
An increasing number of commentators are buying into the view that the current environment is similar to that of 1995-96 or 1998, where the Fed temporarily cut rates amidst a broader tightening cycle. The Fed is unlikely to give a clear policy signal Thursday and will likely remain data dependent, but market pricing remains consistent with a view that the next move will be a cut, with almost a full 25bps cut priced by the end of the year, followed by another rate cut next year.
US Treasury rates have pushed higher overnight, looking more likely driven by flow than any change in fundamental view. A slight steeping of the curve is evident, with the 2-year rate up 2bps and the 10-year rate up 4bps to 2.54%. In other economic news, euro-area economic confidence – a composite of business and consumer confidence – fell to its lowest level in 2½ years. Q1 euro area GDP data are released tonight, expected to show a small 0.2 q/q% increase.
In other news, US and China trade negotiators will be back at the table this week in Beijing to finalise an agreement. US Treasury Secretary Mnuchin said that the enforcement mechanisms, one previous sticking point, were “close to done”, although more work needed to be done on some important issues. Officials will meet again in Washington next week and then get Trump involved to decide if sufficient agreement has been reached for a yet-to-be-determined leaders meeting.
Currency price action has been muted. The USD is slightly weaker, which might be related to month-end flows, where some selling pressure is possible. The NZD has traded a 25pip range since the open and sits this morning about 0.6670, up a touch from last week’s close. The AUD is up 0.2% to 0.7060. EUR is up 0.3% to 1.1180.
NZ swap rates had an upward bias yesterday, with some fading of rate cut expectations. The market lost some conviction that the RBA and RBNZ would cut rates next week. For the RBNZ meeting, OIS market pricing rose from 1.6150% to 1.65%, taking the probability of a 25bps cut from 54% down to 40%. This spilled over into the swaps curve, seeing the 2-year rate up 3bps to 1.67%, while the10-year rate was up just 1bp to 2.21%. Markets have been confused by recent RBNZ communication, dating back to the surprise overt dovish bias introduced at the March OCR and subsequent media interviews by Governor Orr, which haven’t given a clear policy signal.
The economic calendar through the next 24 hours is full. The ANZ business outlook survey is likely to continue to show sub-par levels of confidence and activity expectations. But next month’s survey will be much more important as it will capture the government’s decision to abandon a capital gains tax policy and confidence could well show a notable rebound in May.
China PMI data will also be closely watched. Another positive read would add to the “green shoots” of recovery story and support commodity currencies. Tonight the key data releases are euro-area GDP, Germany CPI and the US employment cost index.
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