Main Themes: A rebound in sentiment continued on hopes of thawing tensions between the US and Mexico. Shares were higher as result, but bond yields held at low levels. The European Central Bank (ECB) signalled that rates would be on hold for longer, but a lift in the euro suggested markets were positioned for something more dovish.
Share Markets: Shares lifted on the hopes that the US tariffs on Mexico could be delayed. There was a report that the US could delay the tariffs on Mexico, and another news report that an immigration deal was being discussed to prevent the tariffs from going ahead. The S&P500 rose 0.6%, the third consecutive increase. The Dow was up 0.7%.
Interest Rates: Yields on US treasuries continued to hold at low levels despite the improvement in risk appetite. Expectations of monetary easing by central banks are keeping yields under downward pressure. The US 10-year yield fell 2 basis points to 2.12%.
Foreign Exchange: The euro rose despite ECB President Draghi’s dovish stance, suggesting markets were positioned for a clearer easing signal. Conversely, the US dollar index weakened. The Australian dollar edged slightly higher, but held just below US 70 cents, supported by the improvement in sentiment.
Commodities: Oil prices jumped, supported by the hopes that US tariffs on Mexico would be delayed. Gold prices edged higher, continuing to be supported by expectations of monetary stimulus and and lingering trade concerns.
Australia: The trade surplus held at $4.9 billion in April, just shy of the record high of $5.0 billion in February. Exports rose 2.5% in April, rebounding from a 1.6% fall in the previous month. Higher iron ore prices drove metal ores & mineral exports 16.2% higher, and there were gains in metal and non-monetary gold exports. Imports also recovered, rising 2.8% in April. It was the first gain in three months. The increase was broad-based with imports of consumption goods, capital goods and intermediate goods lifting in April.
Europe: The European Central Bank (ECB) has signalled that interest rates were likely to stay at current levels through to mid-2020, longer than indicated previously. Moreover, the discussion moved away from a rate hike to providing additional monetary stimulus. Indeed, ECB President Draghi said that “several members raised the possibility of further rate cuts. Other members raised the possibility of restarting the asset purchase programme or further extensions in the forward guidance”. Growth and inflation forecasts were upgraded slightly for 2019, but the ECB cut its forecasts over 2020 and 2021.
In economic data, GDP growth for the March quarter was unrevised at 0.4% and 1.2%.
United States: The US trade deficit narrowed from $51.9 billion in March to $50.8 billion in April, but reflected both exports and imports declining. Exports fell 3.1%, the largest drop since early 2015, led by a sharp fall in aircraft exports. Exports of soybeans and consumer goods also fell. Imports dropped 2.5% in the month. It highlights the impact of the US war on trade with the rest of the world.
Initial jobless claims were steady at 219k for the week ending June 1 continuing to indicate strength in the labour market.
New York Federal Reserve President Williams said that his baseline view on the economy was “a very good one” but that needed to “be prepared to adjust our views on what’s happening with the economy and where the economy is likely going to go”. On interest rates Williams said that the Fed may leave them where they are and may adjust them, reiterating a open stance as reflected in other Fed commentary.
Today’s key data and events:
AU AiG Perf of Construction May prev 42.6 (8.30am)
AU Housing Finance (ex refi) Apr (11.30am)
No. of Owner Occupier exp 0.0% prev -2.8%
Value of Investor exp 1.5% prev -2.7%
Value Owner Occupier exp 0.0% prev -3.4%
EZ Ger. Industrial Production Apr exp -0.5% prev 0.5% (4pm)
US Non-farm Payrolls Change May exp 180k prev 263k (10.30pm)
US Unemployment Rate May exp 3.6% prev 3.6% (10.30pm)
US Average Hourly Earnings May exp 0.3% prev 0.2% (10.30pm)
US Consumer Credit Apr exp $13.0bn prev $10.3bn (5.00am)
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