Main Themes: A bit of risk aversion crept back into financial markets after President Trump threatened Syria and Russia with missile threats. Against this backdrop, share markets fell and bonds rallied.
Share Markets: Geopolitical tensions spurred a sell-off in share markets. The Dow Jones fell 219 points (or 0.9%) and the S&P 500 index dropped 15 points (or 0.6%).
Interest Rates: The US 10-year treasury yield initially fell from 2.80% to 2.75% before retracing to 2.78%. US 2-year yields also did a round trip between 2.32% and 2.28% to finish the session flat. Fed fund futures yields slipped to price the next rate hike in June as an 86% chance. The slightly hawkish minutes from the Federal Reserve Open Market Committee (FOMC) meeting were overshadowed by the Trump headlines.
Foreign Exchange: The US dollar index stuck to a narrow trading range overnight and remains little changed on 24 hours earlier. EUR/USD rose from 1.2360 to 1.2396, before falling to 1.2347. USD/JPY fell from 107.10 to 106.65; the yen outperformed due to safe-haven flows amid geopolitical tensions. The AUD has preserved its recent gains and did not deviate very far from 0.7750 handle for much of the overnight session.
Commodities: The world price of oil surged to its highest since 2014 after a missile attack from Yemen on Saudi Arabia. Gold also jumped about 1% overnight on safe-haven flows.
Australia: In a speech yesterday Reserve Bank of Australia (RBA) Governor Lowe said the main uncertainties in the economic outlook are in the international arena. Lowe noted a serious escalation of trade tensions would “put the health of the global economy at risk and damage the Australian economy”. On the interest rate outlook, Lowe said “the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy” and indicated, as he has previously, that the next move in interest rates was likely to be a rate hike. We remain comfortable with our view that the RBA will leave interest rates unchanged this year.
Consumer confidence eased 0.6% to 102.4 in April, from 103.0 previously, according to the Westpac-MI measure. The index remains above 100 for the fifth consecutive month, indicating more consumers are optimistic than pessimistic. The current conditions component was unchanged for April. The expectations component fell 0.9% in April, with a decline in consumers’ expectations for their family finances in the year ahead.
China: Consumer prices rose by 2.1% in the year to March. This result was down from 2.9% in the year to February when the pace of inflation growth was boosted by strong demand for the Lunar New Year holiday. The pace of annual CPI inflation growth in March, however, remains well above its pace throughout most of 2017. Meanwhile, producer prices rose by 3.1% in the year to March, a slowdown from an increase of 3.7% in the year to February and the slowest pace in seventeen months. It was the fifth consecutive monthly decline in the annual pace of growth in producer prices.
Japan: Producer prices were in line with consensus expectations, falling by 0.1% in March, after rising 0.1% in February. For the year to March, producer prices rose by 2.1%, down from 2.6% in the year to February.
Core machinery orders were stronger than expected, rising by 2.1% in February, following an 8.2% jump in January. While volatile in nature, the recent strength in machinery orders suggests an encouraging outlook for business investment in Japan.
Europe: European Central Bank (ECB) officials repeated their cautious and gradual path for guidance (withdrawal of accommodation) whilst also highlighting improvement in the region’s economy. However, ECB President Draghi also stated that there is a real risk of confidence being impaired by trade spats even if the actual direct tariff impacts are limited.
United Kingdom: Industrial production in March missed expectations, rising by just 0.1% versus expectations for 0.4%. There were also historical downgrades to the data. Construction again proved to be particularly soft. Construction fell by 1.6% in February and by 3.0% in the year to February. Meanwhile, the trade deficit improved to just below €1 billion, but was overshadowed by the miss in production data.
United States: The FOMC minutes had a mildly hawkish lean; members cited a "significant" growth boost from tax cuts and “all members” noted the outlook beyond the current quarter had strengthened in recent months. “A number” believed the outlook called for a steeper path for hiking. However, “a couple” of Fed officials cited the benefits of delaying a rate hike last month and a "strong majority" saw the prospects for a trade war representing downside risks.
Headline consumer prices fell by 0.1%, against expectations for a flat outcome. The core inflation rate matched consensus, rising by 0.2% in the month. The annual core rate has perked up from 1.8% to 2.1%, its highest pace in a year, as weak CPI reads from a year ago drop out of the calculations.
Today’s key data and events
AU Consumer Inflation Exp’n Apr prev 3.7% (11am)
AU Housing Finance Feb (11.30am)
No. of Owner Occupier exp 1.5% prev -1.1%
Value of Investor exp 0.5% prev 1.1%
EZ Industrial Prod’n Feb exp 0.1% prev -1.0% (7pm)
US Import Prices Mar exp 0.1% prev 0.4% (10.30pm)
US Export Prices Mar exp 0.2% prev 0.2% (10.30pm)
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.
Besa Deda, Chief Economist