Main Themes: Trade worries remained at the fore with news that the US was considering more Chinese tech firms would be added to the blacklist. There was minimal reaction from the Federal Reserve minutes which reiterated the Fed’s patience stance. Shares and bond yields were down, while currencies were little changed.
Share Markets: US share markets remained on the backfoot, as trade tensions continued to linger. Tech led the weakness with the Nasdaq down 0.5%. The Dow fell 0.4%, while the S&P500 dropped 0.3%.
Interest Rates: Yields on US treasuries fell, as sentiment remained fragile. US 10-year yields dropped 4 basis points to 2.38%.
Foreign Exchange: The US dollar index dipped but then recovered to be marginally higher overnight. Sterling fell, after a news report said that May was about to resign. The Australian dollar held in a tight range, but remains close to its lowest since the January flash crash. AUD is trading at 68.8 US cents this morning.
Commodities: Oil prices dropped, as lingering trade concerns continue to fuel concerns about demand. Another trigger for weakness came from an unexpected build in US crude inventories.
Australia: Construction work done fell 1.9% in the March quarter, following a 2.1% decline in the December quarter of last year. One source of weakness was expected. Dwelling investment fell 2.5%, and has declined for three consecutive quarters reflecting the downturn in the housing market. The decline in engineering construction of 3.9% in the March quarter was a bit more suprising given the large pipeline of public infrastructure spending. Some of the weakness came from Western Australia and the Northern Territory, suggesting further wind down of mining investment projects. Non-residential building partially offset weakness in the other to areas, liftring 3.6% in the March quarter.
The Westpac Leading index slipped 0.09% in April, after a temporary increasing 0.28% in March. The index is continuing to suggest economic growth over the next nine months is likely to be below trend.
Japan: Japan’s trade surplus narrowed from ¥527.8 billion in March to ¥60.4 billion in April, the smallest in three months. Exports remained in contraction declining 2.4% in the year to April, unchanged from March. The weakness in exports was largely driven by exports to China, suggesting a negative impact from trade tensions and weaker Chinese demand. Imports were 6.4% higher in the year to April, following a 1.2% annual increase in March, reflecting higher crude oil prices.
Core machine orders rose 3.8% in March following a 1.8% increase in February. It was well above the consensus estimate for a flat outcome. Indicators on business spending remain firm, but the recent reigniting of trade tensions suggests some downside risks to the outlook.
New Zealand: Retail spending rose 0.7% in the March quarter, following a solid 1.7% increase in the December quarter. Spending has been supported by strength in the labour market and government handouts.
United Kingdom: The UK house leader and Brexit supporter, Andrea Leadson, has resigned from government, adding to recent pressure on Prime Miniser May to resign. It follows an attempt by May to push her amended Brexit deal through parliament for a fourth time, but looks set to fail again.
Headline CPI edged up from an annual rate of 1.9% in March to 2.1% in April, reflecting higher energy costs. While a lift in inflation was expected, it was below the consensus estimate of 2.2%. The core rate was steady at 1.8% against consensus estimates to lift to 1.9%.
United States: The minutes of the FOMC meeting on April 30- May 1, indicated that “patient approach” in setting interest rates “would likely remain appropriate for some time”. It was consistent the view previously expressed by Fed Chair Powell, that the level of interest rates was appropriate for now, and that there wasn’t a strong case to move in either direction. In response to a recent drop in inflation, participants mostly suggested some temporary factors.
In a speech in Hong Kong yesterday, St Louis Federal Reserve President Bullard said that a cut to official interest rates could become “a more attractive option” if inflation keeps disappointing.
Mortgage applications rose 2.4% for the week ending May 17, lifting for the second time in three weeks, suggesting some response to the recent fall in long-term interest rates.
It has been reported that the US is considering to add five other Chinese technology firms in addition to Huawei in restrictions on dealing with US firms.
Today’s key data and events:
JN Nikkei PMI Manufacturing May prev 50.2 (10.30am)
EZ Markit Manufacturing PMI May exp 48.1 prev 47.9 (6pm)
EZ Markit Services PMI May exp 53.0 prev 52.8 (6pm)
EZ Ger. IFO Business Climate May exp 99.1 prev 99.2 (6pm)
US Markit Mfg PMI May exp 52.6 prev 52.6 (11.45pm)
US Markit Services PMI May exp 53.5 prev 53.0 (11.45pm)
US New Home Sales Apr prev 4.5% (12am)
US Kansas City Fed Mfg May exp 6 prev 5 (1am)
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