- The disappointing US auto sales and poor Apple sales figures reported yesterday have had little impact on the broader investment climate
- Press reports suggest the EU will demand 100 bln euros from the UK as part of the cost of severing the treaty
- New Zealand posted a healthy jobs report
- Before getting to the FOMC meeting, investors will learn the ADP estimate for private sector jobs
- Turkey April CPI rose 11.9% y/y vs. 11.7% expected
The dollar is mostly firmer against the majors. The Swiss franc and the Loonie are outperforming, while the Aussie and sterling are underperforming. EM currencies are mostly weaker. MYR and PHP are outperforming, while MXN and TRY are underperforming. MSCI Asia Pacific ex-Japan was down 0.3%, with Japan markets closed for the rest of the week. MSCI EM is down 0.1%, with China markets falling 0.4%. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year US yield is up 2 bp at 2.30%. Commodity prices are mixed, with oil up 0.8%, copper down 2.2%, and gold down 0.2%.
The global capital markets are relatively calm. Japan, South Korea, and Hong Kong markets are closed for national holidays. Investors await the FOMC statement, though expectations could not be much lower.
The disappointing US auto sales and poor Apple sales figures reported yesterday have had little impact on the broader investment climate. US 10-year Treasuries are hovering just below 2.30% and remains within the range set since popping higher in response to the first round of the French presidential election a week and a half ago.
The US dollar is posting minor gains against all the major currencies and many in the emerging markets. The euro’s gains fizzled in Asia near $1.0935, the upper end of the recent range. The first estimate of Q1 17 GDP was in line with expectations rising 0.5%. The year-over-year pace slipped to 1.7% from 1.8% when it had been for the past two quarters. We note that the slower growth that we had anticipated on ideas that the survey data was running ahead of the real sector was picked up in GDP data for the broader EU. Growth for the 28 members slowed to 0.4% from 0.6%, though the year-over-year pace was steady at 1.9%.
UK BRC Shop price index fell 0.5%, which was largely as expected. The aggregate conceals that food prices rose and non-food prices fell. Following yesterday’s stronger than expected manufacturing PMI, the UK reported an unexpected rise in the construction PMI. It rose to 53.1 from 52.2. Many had looked for a small pullback. It is the strongest reading since December and is above the Q1 average (52.3). Sterling is a little softer against the dollar. Although the market is not showing much penchant for testing the $1.3000-$1.3055 area, pullback remains limited too. Support over the past five sessions has been built in the $1.2865-$1.2885 area.
Sterling is steady to firmer against the euro, despite the front page story in the Financial Times being the EU’s demand for 100 bln euro as part of the cost of severing the treaty. Ultimately, the important thing at this juncture is not the amounts being bandied about, but an agreement on the methodology for calculating that cost. The other point that may still not be fully grasped is that with Article 50 being triggered, the balance of power shifts to the EU and away from the UK.
The Australian dollar is the weakest of the majors. It is off about 0.7% at ~$0.7485. It is snapping a three-day advance that brought it up from $0.7440 to $0.7555 yesterday. A sell-off in financials and material sectors dragged Australian shares 1% lower, which is the largest loss in six weeks, after reaching a two-year high at the start of the week.
Iron ore and copper prices are weaker today. We note that oil prices have stabilized after yesterday’s 2.4% drop on news of stepped up Libyan output. The decline in the API inventory estimate steadied prices after hitting six-week lows. According to the API, US crude inventories fell 4.16 mln barrels last week and gasoline inventories fell by 1.93 mln barrels. The DOE estimate is due out later today. By its calculations, oil inventories have fallen for the past two weeks.
In contrast, New Zealand posted a healthy jobs report. The unemployment rate unexpectedly ticked down to 4.9% from 5.2%, on stronger than expected jobs growth. The New Zealand dollar initially rallied to almost $0.6970, a six-day high, before reversing lower, setting the stage for a possible shooting star candlestick formation, depending on the close.
Before getting to the FOMC meeting, investors will learn the ADP estimate for private sector jobs (~175k after 263k in March). It so badly missed the March BLS non-farm payrolls estimate (89k) that today’s report may not have much impact. Shortly after the ADP report, the US Treasury will make two announcements. First, it will announce the size of the Q2 refunding. Second, it will release the minutes of the recent advisory committee meeting that likely discussed the issuance of an ultra-long Treasury bond.
This is a decision that the Treasury Department makes without Congress. Many participants are skeptical that a sufficient supply of, say, 50-year bonds can be issued that will significantly impact the average duration of the $14 trillion (marketable securities) market. There is also concern that in order to draw investors into that duration, a concession (higher yields) will be demanded.
The US also reports services PMI and non-manufacturing ISM. The flash PMI slipped to 52.5 from 52.8. It was the third consecutive decline. The Bloomberg survey has the April ISM rising to 55.8 from 55.2. The peak since October 2015 was set in February at 57.6.
There is no press conference following the FOMC meeting. Besides some minor adjustments to its economic assessment, we do not expect the statement to change very much. It is too much to expect strong clues into the June meeting. The Bloomberg calculation puts the odds of a June hike at almost 61%, while the CME’s estimate puts it at 63%. Yet the US two-year yield is lower than it was when the Fed hiked rates last December and in March.
Turkey April CPI rose 11.9% y/y vs. 11.7% expected and 11.3% in March. This is the highest since October 2008 and moves further above the 3-7% target range. The central bank delivered a hawkish surprise in April with a 50 bp hike in the Late Liquidity Window rate. Next policy meeting is June 15, and further tightening seems likely then.