Main Themes: Risk appetites were buffeted by Italian Prime Minister Conte’s maiden Parliamentary speech. Conte’s promise of increased Italian government spending caused financial market jitters about Italy’s debt. Although investor concerns about Italy’s Eurozone membership were soothed by other comments from Conte. Reports the European Central Bank may announce exit plans for quantitative easing at its next meeting were in focus. Upbeat economic data in the US and the UK boosted sentiment.
Share Markets: The stockmarket received a lift from solid US economic data, with the Nasdaq closing at a record high. The Dow slipped 0.1%, the S&P finished up 0.1% and the Nasdaq gained 0.4%.
Interest Rates: US government bond yields edged lower (prices rose) overnight as concerns about increased government spending in Italy drove investors into safe haven US government bonds.
The yield on the US 10-year government bond fell from 2.94% to 2.93%. The yield on the US 2-year government bond fell from 2.51% to 2.49%.
The concerns about Italian debt similarly impacted German bonds. The yield on 10-year German bonds fell from 0.42% to 0.37% on safe haven flows.
Foreign Exchange: The US dollar index (weighted against a basket of currencies) fell 0.1% from Tuesday morning. Sterling had a strong session, benefiting from upbeat UK services sector data.
The Euro gained against the US dollar after Italian Prime Minister Conte said the government had “never considered” leaving the Eurozone. The Euro also benefited from reports the European Central Bank may announce exit plans for quantitative easing at its next meeting. The Yen was little changed from yesterday morning.
After a strong session on Monday, the Australian dollar weakened against the US dollar last night. AUD/USD is trading around 0.7620 at the time of writing.
Commodities: The copper price rose again overnight on heightened labour tensions at the world’s largest mine, BHP’s Escondida in Chile.
Australia: The Reserve Bank of Australia (RBA) board met yesterday. As widely expected, the RBA Board left the cash rate on hold at 1.50%. There were only a few changes in the accompanying statement on the domestic economy. These changes dialled down some of the cautious optimism on the domestic economy.
On the unemployment rate specifically, the RBA noted that it had been “little changed at around 5.5% for much of the past year”. Encouragingly, the RBA is still expecting there will be a gradual reduction in the unemployment rate and a strengthening economy that should see some lift in wages growth over time.
We continue to expect the RBA to leave the cash rate on hold this year and for an extended time. The dovish tweaks in the statement and greater worries over the risks in the global economy support this view.
In terms of data, the current account deficit narrowed to $10.5 billion in the March quarter, from $14.7 billion in the December quarter of last year. The improvement was mostly a result of a turnaround in exports and an improvement in the trade balance from a deficit of $1.0 billion to a surplus of $4.1 billion in the March quarter.
Export volumes recovered 2.4% in the March quarter and import volumes rose by 0.5% in the same period. Net exports are expected to contribute 0.3 percentage points to GDP growth in the March quarter.
We expect 0.9% GDP growth in the March quarter and 2.8% in the year. The turnaround in exports is one of the factors behind the strong outcome, after exports contracted over the December quarter. We are also expecting modest growth in domestic demand, including household consumption, public spending and business spending. Inventories are also expected to provide a positive contribution to growth in the quarter.
China: The Caixin composite purchasing managers’ index (PMI) stayed flat in May at a reading of 52.3. A reading above 50.0 indicates an expansion in activity. The services PMI also stayed steady in the month at 52.9.
Europe: Italian Prime Minister Conte promised more generous welfare, including the introduction of a universal income, and tax cuts.
The Markit Eurozone services PMI edged down to 53.8 for the final reading for May from a final reading of 54.7 in April. The index, however, remains above 50 signalling ongoing expansion in Eurozone services sector activity.
Retail sales were softer than expected, edging up 0.1% in April. Annual growth in retail sales lifted to 1.7%, up from 1.5% in March.
Japan: Household spending fell by 1.3% in the year to April, after a fall of 0.7% in the year to March.
United Kingdom: The Markit/CIPS services PMI was stronger than expected, rising to 54.0 in May, from 52.8 in April.
United States: The ISM non-manufacturing index was stronger than expected, rising to 58.6 in May, from 54.6 in April.
JOLTS job openings hit a fresh record high of 6.698 million in April, from 6.633 million in March, underlying the strength in the US labour market. Job openings exceeded the number of unemployed people for the first time since this data began in 2000.
Today’s key data and events
NZ Job Ads May prev -2.1% (8am)
NZ Volume Buildings Q1 exp 0.5% prev 1.4% (8:45am)
JN Real Cash Earnings Apr y/y exp 0.1% prev 0.7% (10am)
AU GDP (11:30am)
q/q exp 0.9% prev 0.4%
y/y exp 2.8% prev 2.4%
EZ Markit Retail PMI May prev 48.6 (6:10pm)
US Nonfarm Productivity Q1 Final exp 0.6% prev 0.7% (10:30pm)
US Trade Apr exp -US$49.0bn prev –US$49.0bn (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