Main Themes: Trade tensions were at the front of investors’ minds after US President Trump last night threatened sanctions on Germany. US inflation data was also subdued.
Share Markets: US share markets slumped. Tech shares led the declines, as pessimism on world trade deepened. The Dow Jones fell 44 points (or -0.2%) and the S&P 500 index declined by 6 points (or -0.2%).
Interest Rates: US 10-year bond yields ranged between 2.11% and 2.14%, before closing 2 basis points lower. US 2-year bond yields slipped from 1.91% to an overnight low of 1.87% in response to the subdued US inflation data.
Both trade tensions and the inflation outcomes led financial markets to shorten their odds for a near term rate cut. Markets are pricing an 95% chance of a rate cut by July (was 80% yesterday). A total of three US rate cuts of 25bp each are priced by May 2020.
Australian 3-year government bond yields consolidated around 1.05%. Australian 10-year yields did the same around the 1.45% handle. Markets are pricing a 55% chance of an RBA rate cut at next month’s board meeting.
Foreign Exchange: The US dollar index was stronger in the overnight session, mostly reflecting a sell off in the euro, after the US threatened sanctions on Germany. EUR/USD fell from 1.1340 to 1.1283 in response.
The Australian dollar was the worst performing major currency overnight, extending its recent decline from 0.6963 to 0.6922. Uncertainty over the world growth outlook, trade tensions and further cuts from the RBA are likely to keep AUD/USD capped even while the market speculates for a rate-cut cycle to begin soon in the US.
Commodities: Oil fell to US$51 a barrel in New York as US crude stockpiles unexpectedly hit a 20-month high amid subdued products demand.
Australia: The Westpac-Melbourne Institute consumer sentiment index slipped from 101.3 in May to 100.7 in June, despite an RBA rate in the month. Concerns about the economy likely overshadowed the RBA’s decision; indeed, the day following the RBA decision, data revealed that the Australian economy grew at its slowest annual pace since 2009. However, there was a noticeable improvement in sentiment for housing. The “time to buy a dwelling” index rose 1.8% to 116.9. But the major impact was on the house price expectations index which gained 22.7% to 109.7 in June, from 89.7 in the previous month. The move above 100 signifies a clear shift in consumers’ expectations for a more positive outlook for dwelling prices.
China: Consumer and producer price inflation printed in line with market expectations. Consumer price inflation lifted from an annual rate of 2.5% in April to 2.7% in May, boosted by higher food prices. The jump in prices of many food items is likely to be temporary. However, producer price inflation eased from an annual pace from 0.9% in April to 0.6% in May, reflecting lower commodity prices.
Japan: Machinery orders jumped 5.2% in April, following a 3.8% gain in March. This outcome was well above the consensus estimate for a 0.8% decline. Capital spending is showing resilience, despite escalating trade tensions and a fragile global growth environment.
United States: US President Trump threatened to impose sanctions on Germany to stop construction of the Nord Stream 2 gas pipeline between Russia and Germany. Trump said "we're protecting Germany from Russia, and Russia is getting billions and billions of dollars in money from Germany”. The Kremlin responded by denouncing the comments as "blackmail."
On China, Trump expressed optimism a trade agreement can be worked out. Trump said "I have a feeling that we are going to make a deal" while also reiterating his threat to impose tariffs on US$325 billion worth of Chinese imports otherwise.
US inflation outcomes published overnight trailed forecasts in May, bolstering the case for the Federal Reserve to lower rates. Core consumer prices slowed to 2.0% in May, from 2.1% in April. The broader CPI annual growth rate edged down to 1.8% from 2%.
Today’s key data and events:
AU Consumer Inflation Expectations Jun prev 3.3% (11am)
AU Labour Force May (11.30am)
Employment Change exp 5k prev 28.4k
Unemployment Rate exp 5.2% prev 5.2%
Participation Rate exp 65.8% prev 65.8%
EZ German CPI May Final y/y exp 1.3% prev 1.3% (4.00pm)
EZ Industrial Production Apr exp -0.5% prev -0.3% (7pm)
US Import Price Index May exp -0.2% prev 0.2% (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 Ph:02-8254-3251