Main Themes: US President Trump sought to reassure markets, insisting that talks had not broken down between the US and China. Share markets and bond yields partly recovered from yesterday’s decline. The Australian dollar however, remained under downward pressure.
Share Markets: Yesterday’s massive sell-off was partly reversed. The Dow and S&P500 were both up 0.8%.
Interest Rates: US 10-year yields were up 1 basis point to 2.41%. Yields on 2-year notes similarly edged up 1 basis point to 2.20%.
Foreign Exchange: The US dollar index lifted. It gained against the yen, mirroring the more positive mood in equity markets. It reflected a drop in the euro as Italy’s Deputy Prime Minister said that Italy was ready to break the European Union rules on debt levels in order to boost employment. Sterling weakened on an unexpected slowing in wage growth and slowing employment growth. The Australian dollar held onto yesterday’s losses, despite the improvement in risk appetite in other asset markets. It dropped to as low as 69.35 US cents before settling at 69.43 US cents this morning. Broader strength in the US dollar, trade tensions, expectations of monetary easing is weighing on the currency.
Commodities: Oil prices rose, after Saudi Arabian oil facilities were attacked by armed drones. Gold prices weakened, moving inversely with the US dollar.
Australia: There was little positive news in the NAB business survey. Confidence improved from a revised reading of -1 in March to 0 in April, but it was below the long-run average. Conditions weakened from 7 in March to 3 in April, which also sits below the long-run average. A key disappointing aspect of the release is a sharp drop in the employment index. This fell from 6 in March to to -1 in April, the lowest reading since 2015. While the labour market remains stronger than implied by economic growth, other evidence of a soft economy is mounting. It increasingly suggests that the labour market conditions will moderate in coming months.
Europe: Industrial production contracted 0.3% in March as expected. After a 0.1% decline in February and a 2.0% increase in January, the March quarter points to a moderate increase in factory activity.
The ZEW survey indicated confidence deteriorated. The expectations index fell from 4.5 in April to -1.6 in May. In Germany, the expectations index dropped to -2.1 from 3.1. It stems a steady improvement over recent months, likely reflecting the ongoing uncertainty within the global economy.
Japan: The current account surplus widened to ¥2.7 trillion in March from ¥2.8 trillion in February, although the surplus for the Japanese fiscal year ending March narrowed from the previous year. Annual imports were higher on rising commodity prices, while exports grew at a softer rate.
New Zealand: Estimated net migration has eased from 5750 in February to 5020 in March.
United Kingdom: The ILO unemployment rate edged down from 3.9% in February to 3.8% in March, the lowest since 1974. Employment growth however, slowed, increasing 99k in the three months to March after a 179k gain in February. The labour market is continuing to point to tight conditions, despite softening economic growth. Despite the ongoing decline in the unemployment rate, average weekly earnings growth eased from 3.5% to 3.2% versus expectations for growth of 3.4%. While wages growth has trended upwards wage pressures remain well-contained.
United States: The NFIB small business optimism index improved in April to 103.5 from 101.8 in March, but the survey preceded the latest round of tit-for-tat tariffs by China and the US.
Import prices rose just 0.2% in April, below the consensus estimate for a 0.7% gain. The smaller-than-expected increase reflected falls in the prices of capital goods. The strength of the US dollar is helping to keep down prices, and point to ongoing subdued inflation.
Today’s key data and events:
AU WBC-MI Consumer Confidence May prev 100.7 (10.30am)
AU Wage Price Index Q1 (11:30am)
q/q exp 0.6% prev 0.5%
y/y exp 2.3% prev 2.3%
CH Industrial Production Apr y/y prev 8.5% (12pm)
CH Retail Sales Apr y/y prev 8.7% (12pm)
EZ GDP Q1 exp 0.4% prev 0.4% (7.00pm)
US Retail Sales Apr exp 0.2% prev 1.6% (10.30pm)
US NY Empire Mfg May exp 8.0 prev 10.1 (10.30pm)
US Industrial Production Apr exp 0.0% prev -0.1% (11.15pm)
US NAHB Housing Index May exp 64 prev 63 (12am)
US Business Inventories Mar exp 0.0% prev 0.3% (12am)
US Total Net TIC flows Mar prev -$21.6bn (6am)
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