Main Themes: Risk aversion rose overnight, as trade-war fears escalated following President Trump’s announcement overnight on tariffs.
Share Markets: Heightened trade-war tensions caused a sharp sell-off in equities overnight. The Dow Jones closed down 252 points (or -1.0%) and the S&P 500 index fell 19 basis points (or -0.7%).
Interest Rates: Whilst investor nervousness increased overnight, US bond prices were still lower at the close. The US 2-year bond yield rose by 2 basis points and the 10-year bond yield edged up 1 basis point.
Foreign Exchange: The USD index strengthened through European trade, but then lost most of these gains in New York trade. Most major currencies, including the USD index, traded in relatively narrow ranges overnight, despite the trade-war tensions. The Australian dollar was no exception to the narrow trading; it stuck to 0.7476-0.7593.
Commodities: The gauge of base metal prices, the LMEX index, was slightly higher in overnight trade.
Australia: Private capital expenditure (also known as capex) rose by 0.4% in the March quarter. It was the fifth consecutive quarterly increase, but the pace of growth has slowed over the last six months. While it was encouraging to see mining capex lift in the quarter, investment intentions continued to suggest that the unwinding of the mining investment boom is not over just yet. Mining capex rose 1.2% in the quarter. Total non-mining capex (manufacturing and other) grew just 0.1%, weighed down by a drop in manufacturing capex. It was the softest increase in non-mining capex in 1½ years. The second estimate for spending in 2018-19 was $87.7 billion, an upgrade from the first estimate of $83.0 billion previously. However, after adjusting the estimate (using realisation ratios) it implies a virtually unchanged outcome to the previous quarter. The plans for non-mining investment were somewhat discouraging and do not suggest much growth in spending over 2018-19.
Private-sector credit rose by 0.4% in April, in line with consensus and our forecasts, and sticking within a range of 0.3-0.5% growth which has been in place over the last ten months. On an annual basis, growth remained modest at 5.1%, and above the long-run average of 4.7%. A slowing in housing credit was notable. Housing credit grew 0.4% in April for annual growth of 6.0%. It was the weakest annual pace in four years. Business credit grew moderately, lifting 0.5% in April. It saw annual growth lift to 4.3%, from 4.2% previously. Elevated business conditions continue to point to strong activity within the business sector.
Europe: The unemployment rate fell in April in the Eurozone region, from 8.6% in March to 8.5%. In other data, the advance estimate of core consumer prices lifted in May to 1.1% on a year ago, from 0.7% year-on-year in the previous month.
Deutsche Bank shares dropped sharply overnight to a record low after the US Federal Deposit Insurance Corporation (FDIC) put Deutsche Bank on their list of problem banks. This is a list of banks whose problems question their financial viability in the US.
Japan: Industrial production rose 0.3% in April, below expectations for a 1.4% increase. The weaker-than-expected result was mostly due to the electronics sector.
United Kingdom: House prices fell 0.2% in May, taking the annual rate to 2.4%. The slowdown in UK house prices has further to run.
United States: President Trump's administration said it will impose tariffs on steel and aluminium from the EU, Canada and Mexico (effective almost immediately). The announcement came as these major trading partners were fighting for permanent relief from the soon-to-expire exemptions. The responses were swift and strong. Canada announced plans to impose tariffs on US steel, aluminium and other products, starting July 1. The EU said it would take immediate steps to retaliate. And Mexico vowed to impose duties on everything from US flat steel to cheese.
The Federal Reserve’s Beige Book in May showed an upbeat outlook for near-term growth and a pick-up in industrial activity in late April and early May even as concerns about the effects of a possible trade war with China surfaced.
The Beige Book, which offers anecdotal evidence on the health of the US economy and its major industries, showed some concerns about rising steel prices, the agriculture industry in certain regions and projects that are currently in planning stages.
Consumer spending rebounded in April with a 0.6% lift in the month. Soft spending was a major drag on economic growth in the first quarter. This rise in April suggests that the largest contributor to the economy is improving in the second quarter. Meanwhile, personal income rose by 0.3% in April. The also included the personal consumption expenditure (PCE) deflator, a gauge of inflation that the US Federal Reserve tracks. Excluding the volatile costs of food and energy, the core PCE deflator rose by 1.7%.
Initial jobless claims fell by 13,000 to a seasonally adjusted 221,000 in the week ended May 26. Jobless claims can be volatile from week to week. The four-week moving average of claims smooths volatility; it rose slightly by 2,500 to 222,250. Despite the increase, applications for unemployment benefits remain very low by historical standards.
The Chicago purchasing managers’ index (a business barometer) surged 5.1 points to a reading of 62.7 in May, the highest level since January. Any reading over 50 indicates improving conditions. The improvement was driven by increases in both output levels and orders.
Pending home sales fell by 1.3% in April, after a 0.4% increase in March. Compared to the same time a year ago, pending sales were down 2.1%. Leaner listings contributed to the fall in the month, highlighting the persistent shortage of dwelling inventories.
Today’s key data and events
JN Capital Spending Q1 exp 3.1% prev 4.3% (9:50am)
AU CoreLogic House Prices May prev -0.3% (10am)
JN Nikkei PMI Mfg May Final prev 52.5 (10:30am)
CH Caixin Mfg PMI May exp 51.2 prev 51.1 (11:45am)
CH Caixin PMI Mfg May exp 51.2 prev 51.1 (11:45am)
EZ Markit Mfg PMI May Final exp 55.5 prev 55.5 (6pm)
UK Markit Mfg PMI May exp 53.5 prev 53.9 (6:30pm)
US Non-farm Payrolls May exp 190k prev 164k (10:30pm)
US Unemployment Rate Mar exp 3.9% prev 3.9% (10:30pm)
US Avg Hourly Earnings May y/y exp 2.6% prev 2.6% (10:30pm)
US Markit Mfg PMI May Final exp 56.6 prev 56.6 (11:45pm)
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