Main Themes: Markets continued to pare back expectations for aggressive rate cuts this year, digesting recent comments by Fed officials. Trump’s message on trade was mixed overnight, while markets await the outcome of US-China talks over the weekend.
Share Markets: Share markets were mixed overnight. Trade continued to be of focus, but developments remained uncertain ahead of the US and China discussions over the weekend. The Dow was down 0.04% and the S&P500 fell 0.12%, but tech stocks supported the Nasdaq which rose 0.3%.
Interest Rates: Yields on US treasuries lifted as markets continued to wind back expectations of rate cuts from the Fed, after Powell’s less dovish comments from the previous session. US 10-year yields bounced, rising 6 basis points to 2.05%.
Foreign Exchange: Currency markets also continued to digest recent Fed comments, which did not provide the reassurance that aggressive rate cuts were on the way. The US dollar edged slightly higher, although retreated later on. GBP held near five-month lows against the US dollar, after Boris Johnson, the frontrunner to take over PM May, said that he was serious about a no-deal Brexit if the EU was not willing to renegotiate. NZD is trading higher after the RBNZ left official interest rates unchanged, although it dipped temporarily after an incorrect tweet said that it had cut interest rates. Australian dollar rose, stopping short of touching 70 US cents and continuing to gain support from resilient commodity prices. AUD is trading at 69.9 US cents this morning.
Commodities: Oil prices jumped, reflecting a drop in US crude stockpiles. Gold prices dropped as expectations for large scale rate cuts by the Fed continued to fade.
Australia: No major data to report.
New Zealand: The Reserve Bank of New Zealand (RBNZ) left official interest rates unchanged which was widely expected. However, in two parts of the accompanying statement, the central bank said that “a lower OCR may be needed”. It provides a strong signal that the RBNZ will lower official interest rates again, and expect that it will cut rates in August.
The RBNZ was cautious on the domestic economy which was slowing and the intensifying downside risks to the global economy.
United States: In the latest in trade developments, US President Trump has said that a deal with Chinese President Xi was “absolutely possible” this weekend at the G20 leaders summit, but that he was prepared to impose US tariffs on virtually all remaining Chinese imports if an agreement cannot be made. Trump added he could consider lowering the duty from the proposed 25% to 10%.
San Francisco Fed President Mary Daly highlighted the importance of the next few weeks in determining whether there was a case to lower rates. At top of mind was the effect tariffs was having on business and consumer confidence and persistently low inflation. Daly also wanted to see if the latest disappointing May employment report was a one-off. Nonetheless, she said that she had not seen enough hard data to support a rate cut. Daly is a non-voting member of the FOMC this year.
In economic data, durable goods orders fell 1.3% in May following a revised 1.3% decline previously, adding to the range of indicators pointing to softening business activity. On a positive note, when excluding transportation which includes aircraft, durable goods orders were up 0.3%.
Today’s key data and events:
NZ ANZ Business Confidence Jun prev -32.0 (11.00am)
CH Industrial Profits May y/y -3.7% (11.30am)
EZ Economic Confidence Jun exp 104.8 prev 105.1 (7.00pm)
EZ Business Climate Jun exp 0.29 prev 0.30 (7.00pm)
EZ Consumer Confidence Jun final exp -7.2 prev -7.2 (7pm)
EZ German CPI Jun y/y exp 1.3% prev 1.3% (10.00pm)
US GDP Q1 final estimate exp 3.2% prev 3.1% (10.30pm)
US Pending Home Sales May exp 1.0% prev -1.5% (12am)
US Kansas City Fed Index Jun exp 1 prev 4 (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 Ph:02-8253-0898