Yesterday’s fall in US equities, and rise in US rates and USD after Fed Chair Powell uttered the words low inflation may be “transitory” has carried through into another trading session, although on the currency side, changes have been fairly small.
Writing the daily today has been straightforward following the yesterday’s attempt to write during a period of volatility after the Fed announcement – the final version looking quite different to the first draft completed by 6:30am, before Powell opened his mouth. Powell’s comments that recent low inflation may be due to transitory forces caused a big reversal in market pricing and most were left wondering why this view wasn’t part of the official statement some 30 minutes earlier. There has been further follow-through in the post-Powell market move. The US 10-year rate is up 5bps to 2.55%, taking the cumulative gain since Powell uttered those infamous words to 9bps. The S&P500 was earlier down 0.8%, following the 0.8% fall post-Powell yesterday, but has since pared the overnight loss to 0.2% at the time of writing. The USD is broadly higher, but gains are fairly muted.
There hasn’t been a lot of news overnight. The Bank of England didn’t really surprise, continuing to run the line that it would raise rates by more than currently priced into the market (just one hike currently priced through to 2021) if the UK successfully manages a smooth exit from the EU. GDP forecasts were nudged higher, but the near-term inflation outlook was trimmed.
On the data front, US initial jobless claims held up higher than expected after the jump in the previous week, but Easter distortions might still be in play. Trading conditions should be quiet today as the focus turns to the US employment report tonight. The “whisper” number on non-farm payrolls is probably a lot higher than the consensus estimate of 190k for employment. An unchanged (low) unemployment rate and a slight pick-up in wage inflation are expected. All this might well be academic – given Powell’s comments the key market movers over coming months will likely be CPI inflation indicators, to see if they back the Fed’s view that recent low inflation will prove to be transitory.
In other news, a Global Times opinion piece speculated that a US-China trade agreement might have hit an impasse as there were few details revealed after the end of the latest set of meetings. We wouldn’t read too much into that as it contradicts a report yesterday by Politico that a deal was closing in, with some agreement on how the US will roll back the punitive tariffs in place, the last key sticking point. It went further to suggest that expectations are high that the two sides could announce a deal by the end of next week, setting the stage for a summit between Trump and Xi to sign it. A later report on CNBC backed that view up, suggesting a trade deal announcement as soon as next Friday.
Oil prices tumbled, with a report showing Russia didn’t adhere to production cut targets in April agreed with OPEC, with the market already on tenterhooks following yesterday’s report of much higher than expected US crude inventories. Brent and WTI crude are currently down in the order of 2-3%, with the energy sector weighing on US equities overnight.
The NZD currently sits at 0.6620, the same level as when we signed off yesterday’s daily report. The move up to around 0.6640 during local trading hours might have been prompted by a stronger South Korea PMI yesterday – more signs of green shoots of recovery for Asia. But the move hasn’t been sustained as a stronger USD has been the greater force since the NY open. NZ rates nudged higher across the curve yesterday. Pricing for an RBNZ OCR cut next week remains close to the 50/50 mark, a sign that the Bank hasn’t been clear enough in its recent communications.
The AUD has had another peek below 0.70, a key support level that has been in play for the past six months. NZD/AUD is a touch higher at 0.9455. The other key majors on our radar are within 0.1-0.2% of levels seen yesterday morning. CAD has managed to hold its ground despite the plunge in oil prices, but NOK is down 1%.
As well as tonight’s US employment report, other possible market-moving events include euro area CPI and the US non-manufacturing index. A whole host of Fed speakers will be talking at the same conference, with more focus on vice-chair Clarida than the others.
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