Main Themes: The improvement in risk appetite continued for another session as signs that the US and China were willing to negotiate eased concerns of a trade war. Share markets, bond yields and the US dollar rose.
Share Markets: The easing fears of a trade war were supportive of equity markets. European stocks jumped 2.7%, while in the US, the Dow lifted 1.0% and the S&P500 rose 0.7%.
Interest Rates: Stronger financial market sentiment saw US treasuries weaken (yields rose). US 2-year yields rose 1 basis point to 2.30%, while US 10-year yields lifted 3 basis points to 2.83%.
Foreign Exchange: The US dollar index rose on the easing trade tensions. Yen was the underperformer amid the improvement in risk appetite. The Australian dollar fell as the strength in the US dollar outweighed support from the improvement in sentiment. AUD edged down from a high of 77.3 US cents to currently trade at close to 76.8 US cents this morning.
Commodities: Prices of most commodities rose, reflecting the improvement in risk appetite. Oil prices also received a boost from an announcement by the Saudis to increase its official selling price of crude. Gold prices were the exception, which weakened on easing safe haven demand and moving inversely with the stronger US dollar.
Australia: The trade surplus narrowed slightly from $952mn in January to $825mn in February. There have been nine surpluses over the last 10 months. The slight deterioration in February was owing to flat exports, after jumping in January. Additionally, imports rebounded 0.4% following a contraction in the previous month. Strong growth in imports of consumption goods and capital goods is providing a positive signal for consumer and business spending. Despite the flat result for February, exports should continue to contribute more favourably to economic growth in the first half of 2018 after detracting from growth in the December quarter 2017.
The AiG performance of services rose from 54.0 in February to 56.9 in March, the highest reading in over a year. It suggests a strengthening expansion in services. Business-related services are continuing to perform better than consumer-oriented services.
Europe: German factory orders rose 0.3% in February, a more tepid increase than the 1.5% expected. It also followed a revised 3.5% decline in the previous month. Manufacturing has had a weak start to 2018, but followed a particularly strong end to 2017.
The euro zone services PMI was revised down marginally from 55.0 to 54.9 in the final estimate for March further below the recent high of 58.0 in January. The index is still signalling expansion.
Retail sales grew 0.1% in February after a 0.3% contraction in January, also suggesting some loss of momentum in early 2018.
New Zealand: QV house prices rose 7.3% in the year to March, up from a 6.5% annual gain in February. Annual growth in March was the strongest since June 2017. QV has pointed to seasonal factors supporting housing activity.
United States: The US trade deficit widened from $56.7bn in January to $57.6bn in February the highest in nine years. The deterioration for the month was exacerbated by a one-off $1bn charge for broadcasting rights to the Winter Olympics. Nonetheless, strength in the US economy would naturally boost import demand relative to exports.
Today’s key data and events
JN Household Spending Feb y/y exp 0.4% prev 2.0% (9.30am)
EZ German Industrial Production Feb exp 0.3% prev -0.1% (4pm)
US Non-farm Payrolls Mar exp 185k prev 313k (10:30pm)
Unemployment Rate Mar exp 4.0% prev 4.1% (10:30pm)
Avg Hourly Earnings Mar y/y exp 2.7% prev 2.6%
Times are AEST. All data forecasts are m/m or q/q and seasonally adjusted unless otherwise specified. Forecasts for Australian data are our forecasts and for other countries they are consensus forecasts.
Janu Chan, Senior Economist