Main Themes: Financial markets reacted to softer-than-expected US inflation data, suggesting little urgency for a tighter path of interest rate increases by the Federal Reserve. Shares rose, while bond yields and the US dollar fell. The Bank of England (BoE) meeting was also in focus.
Share Markets: Easing inflation concerns was positive for sentiment in share markets. The Dow gained 0.8% while the S&P500 and the Nasdaq both rose 0.9%.
Interest Rates: Yields on US treasuries fell, particularly at the longer end of the curve, as concerns of runaway inflation eased. US 10-year yields fell 4 basis points to 2.96%. Yields on 2-year notes however, were little changed. Although last night’s data was weaker-than-expected, inflation appears to be picking up gradually. Financial markets continue to fully price in another Fed rate hike in June.
Foreign Exchange: The US dollar index slipped following the CPI release. The Bank of England (BoE) left official interest rates unchanged, but a fall in GBP suggested that markets were positioned for a small chance of a hike. The Australian dollar benefited from the weaker US dollar, and also the improvement in financial market sentiment, lifting to 75.4 US cents this morning.
Commodities: Oil prices edged higher, continuing to be supported by the potential sanctions against Iran and also supply disruptions from Venezuela. Gold prices rose, as the US dollar weakened and possibly on the geopolitical tensions between the US and Iran.
Australia: No major data to report.
China: Chinese producer prices edged up from an annual rate of 3.1% in March to 3.4% in April, in line with consensus estimates. Consumer prices meanwhile, eased from 2.1% to 1.8% over the same period. Both measures suggest that price pressures remain muted.
Japan: The current account surplus widened from ¥2.1 trillion in February to ¥3.1 trillion in March. It was the largest surplus since 2007, boosted by incomes, although the trade balance also recovered.
United Kingdom: The Bank of England (BoE) left official interest rates unchanged at 0.5% as widely expected, although market expectations had dialled back significantly in recent weeks for a rate hike. The vote was 7 to 2 in favour, a similar split from the previous meeting. Both economic growth and inflation have been softer than the BoE expected. Governor Carney said that the BoE wanted to see further evidence that economic momentum would “reassert” but viewed that the recent bout of weakness was temporary.
United States: CPI rose 0.2% in April, softer than the 0.3% expected by markets. The annual rate however, stepped up from 2.4% to 2.5%, which was in line with consensus. Core inflation, which excludes food and energy was also a touch under expectations, at 0.1% in the month and 2.1% in the year. There are sufficient signs that inflationary pressures are gradually building, but not to the extent that the Fed would need to step up the pace of tightening.
Despite inflation remaining well-contained, there are further signs that the labour market is tightening. For the week ending May 5, initial jobless claims were steady at 211k, unchanged from the previous week. Claims remain close to 48-year lows.
Today’s key data and events
NZ BusinessNZ Mfg PMI Apr prev 52.2 (8:30am)
AU Housing Finance Mar (11.30am)
No. Owner Occupiers Loans exp -2.0% prev - 0.2%
Value of Investors exp -1.0% prev 0.5%
US Import Prices Apr exp 0.5% prev 0.0% (10:30pm)
US Export Prices Apr exp 0.4% prev 0.3% (10:30pm)
US UoM Consumer Sentiment May exp 98.3 prev 98.8 (12am)
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