Main Themes: The potential US government shutdown loomed over financial markets on Friday night, pushing US yield higher. US Congress continued its shutdown talks over the weekend, although no agreement has yet been reached. The Euro was boosted by hopes of a stable government in Germany after the Social Democrat Party voted to begin formal coalition talks with Merkel.
Share Markets: The US stockmarket strengthened, with investors apparently unperturbed by a potential US government shutdown. The Dow rose 0.2%, the S&P 500 gained 0.4% and the Nasdaq lifted 0.6%.
Interest Rates: US government bond yields rose on Friday night, driven by nervousness about a possible US government shutdown. The yield on the 10-year US government bond rose from 2.63% to a three-year high of 2.66%. The yield on the 2-year US government bond rose from 2.04% to 2.06%.
Foreign Exchange: The US dollar index (weighted against a basket of currencies) rose 0.2% on Friday. The failure of US Congress to reach an agreement on government funding over the weekend is expected to pressure the US dollar today. The Euro hit a three-year high of 1.2295 against the US dollar on Friday. The Euro was unable to consolidate these gains on Friday, but has opened higher this morning. The Euro was regained its footing this morning on news of a political breakthrough over the weekend. Germany’s Social Democrat Party voted to begin formal coalition talks with German Chancellor Merkel paving the way to a stable government in Germany.
The US dollar weakened against the Japanese Yen, which benefited from safe haven flows on Friday.
The Australian dollar is little changed against the US dollar from Friday morning, but is weaker versus the Yen and the Euro. AUD/USD is trading around 0.7998 at the time of writing. The New Zealand dollar softened against the US dollar, but has strengthened versus the Australian dollar. AUD/NZD is currently trading around 1.0990.
Commodities: The WTI oil price fell by US$0.58 to US$63.37 per barrel on Friday, after hitting a three-year high of US$64.47 earlier last week. The decline on Friday reflected concerns about increasing US oil production, although global oil stocks remains tight while global demand has lifted.
Australia: There was no significant data released locally on Friday.
Europe: The current account surplus widened to €32.5bn in November, from a surplus of €30.3bn in October. The increase in exports in November outpaced the rise in imports, resulting in a widening in the current account surplus for the month.
Japan: The Japanese Cabinet Office upgraded its assessment of the Japanese economy and consumer spending for the first time in seven months, in its monthly report, released on Friday. It said “Japan’s economy is gradually recovering”, after saying it was on a recovery path back in December. The Cabinet Office also said consumer confidence is “recovering”, after saying it was undergoing a “gradually recovery” in December.
New Zealand: The BusinessNZ manufacturing PMI fell to 51.2 in December, from 57.7 in November. This was the lowest in five years, although the reading remains above 50, indicating manufacturing activity in New Zealand continued to expand in December, although at a less rapid pace.
United Kingdom: Retail sales volumes for December were weaker than expected, slumping 1.5%, more than wiping out November’s 1.0% increase. It was the largest monthly decline since June 2016, when the Brexit vote shook confidence. Retail sales volumes rose by 1.4% in the year to December, down slightly from an increase of 1.5% in the year to November.
United States: The threat of a US government shut down had little impact on financial markets on Friday night Investors expect Republicans and Democrats to reach an agreement over the weekend. At the time of writing US Congress has not reached an agreement.
Consumer sentiment was weaker than expected, slipping to 94.4 in January, from a final December reading of 95.9, according to the University of Michigan measure. Despite the decline in January, US consumer sentiment remains elevated. The 5-10 year inflation expectations measure lifted to 2.5% in January, from 2.4% in December.
Following a speech on Friday, San Francisco Fed President Williams said “my base case is that three rate increases for 2018 seems like a good starting point” although he added “that’s not something that’s locked in.”
Today’s key data and events
US Chicago Fed Nat Activity Dec exp 0.22 prev 0.15 (12:30am)
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are house forecasts and for other countries are consensus forecasts.
Jo Horton, Senior Economist