Main Themes: The escalation of trade tensions between the US and China remained top of mind for investors overnight. Locally, markets are focussing on the Reserve Bank board meeting today and whether policymakers will opt to cut the cash rate for the first time since 2 August 2016. The decision will be a close one.
Share Markets: US equities recovered, but still closed in the red in the wake of the US President’s threat on the weekend to increase tariffs on Chinese goods. The Dow Jones closed 66 points lower (or -0.3%) and the S&P 500 index finished 13 points weaker (or -0.5%).
Interest Rates: The US 10-year treasury yield opened 5 basis points lower at 2.48%, then rose to 2.50% before closing 6 points softer at 2.47%. The 2-year yield closed down 4 basis points.
The chance of a Fed rate cut by December, implied by Fed fund futures, rose from 65% to 75%.
Foreign Exchange: The USD index stuck to a tight trading range overnight and remains nearly unchanged compared with 24 hours earlier. There was no major economic data overnight to influence the USD’s direction.
The AUD/USD exchange rate recovered from yesterday’s low of 0.6963, which was the lowest rate in three years (excluding January’s “flash crash”). The AUD/USD rose to an overnight high of 0.7003, but is now trading under the 0.7000 handle and is on tenterhooks ahead of the Reserve Bank’s board meeting today. Interest-rate markets are attaching around a 50% chance the RBA will decide to cut the cash rate today. The unequivocally weak inflation result for Q1 against strong jobs data means the RBA’s decision will be a close one. The direction of the AUD in the near term will be determined by the RBA’s policy decision. If the RBA cuts, the AUD should fall sharply. If the RBA keeps its powder dry and shifts to an easing bias, the AUD may still depreciate as the market continues to anticipate rate cuts. If the RBA holds and retains its neutral bias, the AUD/USD would rise sharply. However, we see this latter scenario as less likely.
Commodities: Oil recovered overnight, despite US President’s trade threats to China and the US dispatching warships to the Middle East in a warning to Iran. US crude has retreated around 6% since hitting a six-month peak in late April amid signs global oil markets may not be as tight as feared.
Australia: The RBA meets today and their decision and statement will be published at 2:30pm AEST. For a few months now we have been forecasting RBA rate cuts this year due in large part to the loss of momentum in the domestic economy and the downside risks from housing to the consumer. The case for a rate cut as soon as today has strengthened considerably by the recent weak inflation report for Q1, but our preferred timing for the first move is still August. Today’s decision will be a very close one. The RBA will be weighing up strong jobs data against subdued inflation outomes.
In data published yesterday, job advertisements fell by 0.1% in April, after a decline of 1.7% in the previous month, according to the ANZ survey. It is the sixth consecutive monthly fall. On a year ago, job advertisements are 6.6% weaker. The decline in job ads in recent months suggests some moderation in hiring activity is likely.
In other data, the Melbourne Institute’s inflation gauge for April rose by 0.2% in the month and by 1.8% on a year ago. The annual pace slowed from 2.1% in the previous month.
China: The Caixin services purchasing managers’ index (PMI) rose 0.1 of a point to 54.5 in April, which is the highest reading since January 2018. The 50 mark separates growth from contraction. Export orders within this survey increased the most since the survey began in September 2014.
The Caixin composite PMI, on the other hand, slipped 0.2 of a point to 52.7 in April, weighed down by a slowing in factory activity.
China’s Foreign Ministry spokesman Geng Shuang said yesterday that a delegation was still preparing to go to the US for trade talks. Over the weekend, US President Trump dramatically increased pressure on Beijing to reach a trade deal by saying he would hike tariffs on Chinese goods. Trump’s remarks on the weekend marked a major escalation in trade tensions between the US and China and a shift in tone from Trump, who as recently as Friday had cited progress towards a deal. Trade negotiations are set to start on May 8 in Washington.
Eurozone: Retail sales were flat in March and February’s retailing growth was revised up from 0.4% to 0.5%. The annual growth rate of retailing softened from 3.0% in February to 1.9% in March. This annual rate is the weakest since December.
In other data, the Sentix measure of investor confidence improved from minus 0.3 in April to plus 5.3 in May.
United States: US Philadelphia Federal Reserve President Harker said falling inflation could prove “transitory”, suggesting no reason for the Fed to change monetary-policy settings yet. Harker said he is keeping his medium-range inflation forecasts unchanged and added that one interest rate hike could still be on the cards this year.
Today’s key data and events:
AU AiG Perf. of Construction Index Apr prev 45.6 (8:30am)
AU Trade Mar exp $4.5bn prev $4.8bn (11:30am)
AU Retail Sales, Value Mar exp 0.2% prev 0.8% (11:30am)
AU Retail Sales, Volumes Q1 exp 0.3% prev 0.1% (11:30am)
AU RBA Board Meeting exp 1.50% prev 1.50% (2:30pm)
UK Halifax House Prices Apr exp 0.1% prev -1.6% (5:30pm)
EZ European Union Commission Forecasts (7pm)
US JOLTS Openings Mar exp 7350 prev 7087 (12am)
US Consumer Credit Mar exp $16.0bn prev $15.2bn (5am)
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