Main Themes: US bond yields continued to march higher, underpinning a stronger US dollar.
Share Markets: US share markets pushed higher, but the stronger closes disguised a volatile night that saw indices move in and out of positive territory. Investors continue to mull over the consequences of higher US bond yields and disappointing earnings reports. The Dow Jones closed up 60 points (or 0.3%) and the S&P 500 index finished 5 points higher (or up 0.2%).
Interest Rates: Yields on longer-dated bonds rose by more than short-dated bonds overnight. The US 10-year treasury yield rose from 3.00% to 3.03% - its highest rate since January 2014. US 2-year bond yields rose slightly to 2.49% - the highest since August 2008. Fed fund futures yields continued to price the next rate hike in June as a 100% probability.
Foreign Exchange: The US dollar index resumed its rally to rise to its highest level since January 12 overnight. The rise in US bond yields is helping drive demand for the USD. EUR/USD fell from 1.2240 to a two-month low of 1.2168. USD/JPY rose from 109.00 to a three-month high of 109.38 and has appreciated 5% since late March. AUD/USD fell from 0.7580 to 0.7552 – the lowest since December 13. If the US dollar’s recent resurgence continues, the Australian dollar should remain under selling pressure. The AUD’s next major downside target on the downside is USD0.7500, representing the December low. NZD/USD fell from 0.7100 to 0.7058 - the lowest since December 26. Meanwhile, the AUD/NZD pair rose from 1.0680 to a one-month high of 1.0715.
Commodities: Crude oil closed higher, despite a report from the US Energy Information Administration showing a larger-than-expected build in crude stockpiles in the US. Oil investors were focussed on the lingering issues around an Iran nuclear deal. The deadline is May 12 for a US decision on renewing sanctions on Iran. Overnight, French President Macron gave a last-ditch appeal to salvage the Iran nuclear deal.
Australia: There were few surprises in the inflation data for the March quarter, which was released on Tuesday. Headline inflation was a subdued 0.4% in the quarter, which held the annual rate steady at 1.9%. The two measures of underlying inflation - the trimmed mean and weighted median - are the more relevant measures for the Reserve Bank (RBA). The average of these two underlying measures rose by 0.5% in the March quarter. In annual terms, the average of the two rates of underlying inflation edged higher to 2.0%, the highest in over two years. However, it still sits at the bottom of the RBA’s 2-3% per annum target band.
We do not expect inflation will hit the middle or upper part of the RBA’s target band over the medium term.
Europe: European Central Bank (ECB) executive committee member Mersch said inflation had not weakened as much as projected when the ECB reduced the asset purchasing program from EUR 60 billion to EUR 30 billion". Mersch added that "more resilience will follow eventually”. And Lithuanian policymaker Vasiliauskas suggested that solid economic growth provides room for the ECB to transition away from bond purchases.
Japan: The all industry activity index rose by 0.4% in February, after a fall of 1.1% in January.
United States: There was no major data overnight in the US. In the previous session, new home sales rose by 4.0% in March to an annualised rate of 694k. The previous two months of data was also revised significantly higher. The revisions mean that the March quarter was up 1.4% relative to the fourth quarter. And in other data, consumer confidence rose from 127.0 in March to 128.7 in April. Both the present and expectations sub indices improved over this period.
Today’s key data and events
AU Trade Price Indices Q1 (11:30am)
AU Federal Treasurer’s Pre-Budget Speech (12:30pm)
EZ German GfK Consumer Confidence May exp 10.8 prev 10.9 (4pm)
EZ ECB Monetary Policy Meeting (9:45pm)
Main Refinancing Rate exp 0.0% prev 0.0%
Deposit Facility Rate exp -0.4% prev -0.4%
US Durable Goods Orders Mar exp 1.5% prev 3.0% (10:30pm)
US W’sale Invent. Mar exp 0.7% prev 1.0% (10:30pm)
US Advance Goods Trade Balance Mar exp -US$75.0bn prev –US$75.9bn (10:30pm)
US Kansas Fed Mfg Apr exp 17 prev 17 (1am)
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