Main Themes: Investor sentiment was mixed across asset classes overnight. Disappointing US economic data and rising political tensions in Europe pushed US bond yields and riskier currencies lower, but news that the US would delay tariffs on car imports caused a partial reversal.
Share Markets: US share markets finished higher overnight with the Dow Jones index up 0.5% and the S&P 500 index up 0.6%. Investor optimism arising out of news of the US planning to delay a decision on tariffs on auto imports overcame weak data out of China yesterday.
Interest Rates: The US 2-year and 10-year bond yields fell by 6 and 7 basis points, respectively, before the tariff news caused both yields to recover a few basis points. The chance of a rate cut from the Federal Reserve by the end of this year, as implied by interest-rate futures, rose to 130%. The chance of a rate cut as soon as September moved to 70%.
Foreign Exchange: The USD index is slightly higher in overnight trade. The focus was on the euro after the US said it would delay a decision on tariffs on imported cars and parts by 6 months. EUR/USD initially fell to a low of 1.1178 overnight, but retraced these earlier losses after the announcement on tariffs.
The Australian dollar initially extended its multi-week decline to USD0.6915, which is the lowest rate since January 2016, before regaining some ground and rising to USD0.6937 on the tariff news. Employment data is released later this morning. With the RBA shining the spotlight on jobs data for its forthcoming rate decisions, we expect the AUD to react sharply to a non-consensus outcome today.
Commodities: Oil futures inched up overnight as the prospect of mounting tensions in the Middle East hitting global supplies overshadowed an unexpected build in US crude inventories.
The widely-watched commodities index published by Reuters was also firmer.
Australia: Wages are continuing to grow at a benign pace. In the March quarter, the wage price index lifted 0.5%, which was below the consensus and our estimate for growth of 0.6%. The annual pace however, was in line with expectations at 2.3%, unchanged for three consecutive quarters. Annual wage growth eased in industries which have faced the largest job losses over the past year. These industries include manufacturing, construction and retail. There were however, industries with a noticeable pick up in wage growth. These included mining, professional scientific & technical services and healthcare & social assistance. As a trend, the unemployment rate has held steady at 5.0% over the past five months, but we are expecting a moderation in labour market conditions. Given this outlook, it would seem unlikely for wage growth to pick up substantially.
Consumer sentiment improved modestly, lifting from 100.7 in April to 0.6% in 101.3 in May. The index has held above 100, indicating more consumers are optimistic, for ten of the last twelve months. Ongoing strength in the labour market is likely a key support for sentiment despite the downturn in the housing market. The unemployment expectations index suggested that consumers are upbeat in regards to the labour market – the index declined 5.1% to 120.9, which indicates fewer consumers expect unemployment to rise in the year ahead. Despite the indication that consumers are positive, it hasn’t translated into spending. Indeed, while consumer sentiment has held up, retail spending has stalled.
China: Activity indicators weakened in April, after surprising strength over the March quarter. Some of the strength in March was subject to seasonality issues after the Lunar New Year in February. However, the signs of softer economic activity over April indicates that a recovery is still tentative.
Industrial production weakened from an annual rate of 8.5% in March to 5.4% in April. Retail sales similarly slowed from an 8.7% annual pace to 7.2%. Fixed asset investment also slowed, stepping odwn from a year-to-date annual pace of 6.3% to 6.1%.
Europe: Eurozone economy expanded by 0.4% in the first quarter, confirming the preliminary flash reading. On an annualised basis, the region’s economic growth matched the original growth estimates and arrived at 1.2%. Both the figures met the consensus forecasts. Employment also met consensus expectations. Employment in the region rose by 0.3% in the quarter, matching the pace in Q4, and annual employment growth remained unchanged at 1.3%.
In other news, Italian political tensions heightened overnight. Lega’s Salvini pushed further for Italy to be prepared to breach EU Budgetary guidance and pushed against his coalition partner and 5-star leader Di Maio and Prime Minister Conte. Political tensions are building across Europe as populists gather force in front of next week’s EU Parliamentary elections.
United States: The US Trump Administration announced a six-month delay on auto tariffs against the European Union (EU), originally slated for May 18.
Retail sales unexpectedly fell 0.2% in April, after surging 1.7% in March, which was the largest increase since September 2017. Retail sales in April increased 3.1% from a year ago. The National Retail Federation said the weaker sales result was due to slower tax refunds and the weather, including flooding in the Midwest and “blizzards and extreme temperature swings” elsewhere. Excluding automobiles, gasoline, building materials and food services, retail sales were unchanged in April, after marching 1.1% higher in March.
The moderation in economic activity was also underscored by other data released overnight showing a drop in industrial production last month as manufacturers, especially in the automotive sector, worked off stockpiles of unsold merchandise. Industrial production fell 0.5% in April, after rising 0.2% in March. The third drop in production this year was led by manufacturing. Output at factories declined 0.5% as motor vehicles and parts production tumbled 2.6%. Automobile assembly plants are cutting back production as slowing sales have led to a glut of vehicles in showrooms. Production was also hammered by a 1.8% tumble in aircraft and parts output last month. The drop, which was the largest since 2013, probably is the result of Boeing cutting production of its troubled 737 MAX aircraft.
The Atlanta Federal Reserve cut its Q2 GDP growth estimate to a 1.1% annualised rate, from a 1.6% pace. It follows growth of 3.2% in Q1.
The NAHB homebuilders’ confidence increased to a seven-month high of 66 in May, from 63 in the previous month and above market expectations of 64. The sub-index for current single-family home sales rose to 72, from 69 in April; the gauge for home sales over the next six months edged up to 72, from 71, and prospective buyers went up to 49 from 47.
Today’s key data and events:
AU Consumer Inflation Expectations May prev 3.9% (11am)
AU Labour Force Apr (11:30am)
Employment Change exp 10.0k prev 25.7k
Unemployment Rate exp 5.1% prev 5.0%
Participation Rate exp 65.7% prev 65.7%
AU RBA Assistant Governor Bullock Speaks (12.45pm)
EZ Trade Balance Mar prev 19.5 (7.00pm)
US Housing Starts Apr exp 6.2% prev -0.3% (10.30pm)
US Building Permits Apr exp 0.2% prev -0.2% (10.30pm)
US Philadelphia Fed Index May exp 9.0 prev 8.5 (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.
Besa Deda, Chief Economist