Main Themes: Sentiment remained weak ahead of new US tariffs due to be imposed on China tonight, although there was a late improvement after Trump said he received a “beautiful letter” from Xi. Talks between the two sides remain ongoing. Share markets and bond yields fell. The US dollar was also down.
Share Markets: US share markets were again in the red. The S&P500 declined for the fourth consecutive day and is down 2.5% from its peak in late April. In last night’s session, the S&P500 dropped 0.3%, while the Dow fell 0.5%.
Interest Rates: Concerns over tariffs saw bond yields weaken. The US 10-year fell 4 basis points to 2.44%. US 2-year yields similarly fell 4 basis points to 2.56%. The 10-year yield once again fell below 3-month rates for the first time since March. This inversion of the yield curve had earlier sparked concerns over risks on recession.
Foreign Exchange: The US dollar index took a step down, beginning to get hurt by the trade tensions. The yen outperformed, benefiting from safe-haven flows. The Australian dollar dipped as sentiment weakened but then recovered to be little changed over the past 24 hours. It has continued to hover just below 70 US cents.
Commodities: Commodity prices were mostly weaker on the trade uncertainty. Oil prices dipped but then partially recovered. Gold prices rose, continuing to benefit from the the risk averse environment.
Australia: There was no major economic data released yesterday.
China: Consumer prices rose by 2.5% in the year to April, up from annual growth of 2.3% in March. The outcome met market expectations. The higher result was driven by growth in food prices. However, wholesale or pipeline inflation remains sluggish; producer prices grew by 0.9% in the year to April, from 0.4% in March. In the near term, we expect the People’s Bank of China to maintain supportive policies, especially given the potential for downside risks from the US-China trade talks.
United Kingdom: The Bank of England’s (BoE) Monetary Policy Committee member Saunders said that in the event of a smooth Brexit, he “would expect interest rates will go a bit higher over time, but it won’t be far or fast”.
United States: The trade deficit slightly widened from $49.3 billion in February to $50.0 billion in March. Exports rose 1%, boosted by soybean shipments, while imports rose 1.1%. Some focus was on the trade gap between China, which fell to its lowest since 2016.
Initial jobless claims fell 2k to 228k for the week ending May 4. Claims continue to hover higher than the recent lows over March and early April, prior to the Easter period. However, they remain at a level consistent with healthy gains in the labour market.
Today’s key data and events:
NZ Card Spending Apr prev -0.2% (8:30am)
JN H’hold Spending Mar y/y exp 1.6% prev 1.7% (9:30am)
JN Labour Cash Earnings Mar y/y exp -0.5% prev -0.7% (9:30am)
AU RBA Statement on Monetary Policy (11:30am)
UK GDP Q1 exp 0.5% prev 0.2% (6:30pm)
UK Industrial Production Mar exp 0.1% prev 0.6% (6:30pm)
UK Construction Output Mar exp -0.9% prev 0.4% (6:30pm)
UK Trade Mar exp -£4.6bn prev -£4.9bn (6:30pm)
US CPI Apr exp 0.4% prev 0.4% (10:30pm)
US Fed’s Williams Speaks (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