Main Themes: Investor sentiment was slightly softer. Earlier media reports expressing concern over whether Trump would withdraw the US from the Iran international nuclear deal weighed on sentiment. Some of that weakness was reversed later in the session after Trump confirmed the US will withdraw from the ‘defective’ Iran nuclear deal, but is willing to negotiate a new deal with Iran.
Share Markets: The US stockmarket finished unchanged, following weakness earlier in the session. The Dow, S&P 500 and Nasdaq were all unchanged for the session.
Interest Rates: US government bond yields rose despite the somewhat more risk adverse tone in financial markets overnight. The yield on the 10-year US government bond rose from 2.95% to 2.98%. The yield on the 2-year US government bond rose from 2.50% to 2.51%.
Foreign Exchange: Risk aversion supported the US dollar. The US dollar index (weighted against a basket of currencies) rose 0.4% from Tuesday morning. Earlier in the session the US dollar index hit its highest level since December, although it is off those highs now.
The Euro weakened against the US dollar. Sterling lost ground against the US dollar, but recovered most of those losses later in the session. The Yen is trading little changed from yesterday morning.
Diminished risk appetites weighed on the Australian dollar. AUD/USD fell from a high of 0.7528 yesterday morning, to trade around 0.7452 at the time of writing. Most of the Australian dollar losses occurred before the release of the Federal Budget last night.
Commodities: Commodity prices weakened, led by a decline in the oil price. The WTI oil price finished at US$69.10 per barrel, down US$1.70 for the session.
Australia: In the Federal Budget released last night, the Government forecast an underlying deficit of $14.5 billion (-0.8% of GDP) in 2018-19. It was $6.0 billion better than the previous estimates contained in the Mid-Year Economic and Fiscal Outlook (MYEFO). Further, it will be the smallest deficit since the global financial crisis (GFC). The government’s bottom line was boosted by strong tax revenue growth due to stronger economic activity. Moreover, the Budget is now expected to be back in the black one year earlier – in 2019-20. Personal income tax cuts were a key feature of the Budget, older Australians received assistance and infrastructure spending remained important in the Budget.
Retail spending disappointed in March, reporting no growth for the month. This followed stronger growth of 0.6% in February. After adjusting for the impact of prices, retailing volumes rose a meagre 0.2% in the March quarter, a lacklustre result following the 0.8% increase in the December quarter. Limited wage growth, high household debt burdens and the softening in the housing market are keeping a lid on household spending. That said, solid employment gains should be supportive.
China: The trade balance swung from a deficit of $4.98bn to a surplus $28.78bn in April. Exports rebounded to grow at a 12.9% annual pace in April up from a 2.7% contraction in March. Imports grew strongly, up 21.5% in the year to April, signalling ongoing strength in Chinese domestic demand.
Europe: German industrial production rose by 1.0% in March. This followed a decline of 1.7% in February. Annual growth in industrial production rose by 3.2% in March, up from 2.2% growth in February.
United States: NFIB small business optimism edged up to 104.8 in April, from 104.7 in March, defying consensus expectations for a small decline.
Today’s key data and events
US PPI Final Apr y/y exp 2.8% prev 3.0% (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.
Jo Horton, Senior Economist