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US CPI likely holds the key for equity and FX markets. Tuesday’s US NFIB survey brought more evidence of wage pressures.

By Nick Parsons

The Australian Dollar struggled to get much traction on Tuesday and on a day when the US Dollar performed quite poorly, AUD/USD ended pretty much where it had begun in Sydney around 0.7850. The pair had a quarter-cent sell-off early afternoon in Europe as a few Fed headlines hit the newswires but regained all the losses within the space of under an hour. The AUD/NZD cross was again quite lively but in the opposite direction to Monday; falling more than half a cent from a best level just under 1.0840 to the 1.0770 area.

The NAB monthly business survey was released yesterday. According to the details on their website, the business conditions index jumped 6pts to a strong +19 index points, which is well above the long-run average of +5 index points. The business confidence index also rose by 2pts to +12 index points, its highest level since April 2017. Business conditions are solid to strong across all major industry groups with the exception of retail. The construction industry in particular is performing well. “The improvement in construction conditions over the last twelve months is due to improved trading conditions, profitability and employment, and probably reflects the still elevated residential construction pipeline, infrastructure construction and the gains in non-residential building approvals last year. The lift in employment is particularly significant given the rising share of employment found within the construction industry.” With the RBA most especially focused on wage growth and household consumption, the softness of the retail sector should be watched carefully as a coincident indicator of consumer confidence. We noted here on Monday that CBA have already changed their RBA forecast to no change in rates this year.

In her speech on Tuesday, RBA Assistant Governor Luci Ellis spoke of the three key issues confronting the economy: How much spare capacity it has; how much wage growth and inflation will pick up; and how resilient will consumption growth be if income growth remains weak. She said Australia has “had especially strong employment growth over the past year – more than double the rate of growth in the working-age population… But that hasn’t translated into strong consumption growth. Household income growth has been weak for a number of years, and that has weighed on consumption growth.” As for the current situation, high levels of household debt – around 188% of income – are already weighing down on spending. Ms. Ellis noted there are already some signs of this in consumption data as “growth in spending on discretionary items, like travel and eating out, has slowed while growth in spending on essentials has held up.” The Australian Dollar opens in Asia at USD0.7855, with AUD/NZD at 1.0795 and GBP/AUD1.7665.

Most of the movement in the New Zealand Dollar is being driven by the AUD/NZD cross rather than by any great shift in sentiment or investor appetite elsewhere offshore. This pair is currently ranging between a 6-month low of 1.0750 and Monday’s high of 1.0840 and as it fell during Tuesday’s Northern Hemisphere session, so NZD/USD has recovered in to the high 72’s and is up almost a cent from last week’s one-month low.

In political news, New Zealand's opposition leader Bill English is quitting after losing last year's election. The former prime minister said he was resigning as leader of the conservative National Party and leaving Parliament. Mr. English, a long-serving finance minister who took over as prime minister in late 2016 after the resignation of John Key, led the National party to win the biggest share of seats in parliament in last year’s September election but was then unable to form a government. His statement said, “Now is the right time for me to step aside and embark on new professional and personal challenges. I informed the National caucus this morning that I am resigning as leader of the National party… I believe this will give National’s new leader time to prepare the party for the 2020 election.”

In economic news today, we have food price inflation and the RBNZ’s own quarterly survey of inflation expectations. In last month’s survey the one and two-year expectations were at 1.87% and 2.02% respectively. The New Zealand Dollar opens in Asia this morning at USD0.7275 and AUD/NZD1.0795.

The British Pound had a better day on Tuesday, finishing in second place behind the EUR on our one-day performance table, with GBP/USD having been up on a 1.39 handle for the first time since Friday and GBP/AUD having briefly revisited 1.77.

UK inflation figures were released Tuesday morning, with the headline CPI stuck at 3.0% rather than falling to 2.9% in line with consensus expectations. The Office for National Statistics noted that, “The largest downward contribution to change in the rate came from prices for motor fuels, which rose by less than they did a year ago. The main upward effect came from prices for a range of recreational and cultural goods and services, in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago.” It’s not often that the cost of looking at giraffes and penguins moves international foreign exchange markets, but the GBP got a lift from the fact that inflation didn’t fall as had been anticipated.

In separate figures, UK house price growth accelerated to 5.2% in the year to December, up from 5.0% in November. The house price index compiled by the Office for National Statistics and the Land Registry shows average UK house price hit £227,000 in December 2017, up £1,000 from the previous month and £12,000 higher than in December 2016. Scotland and the South West experienced the highest annual house price growth, registering 7.7 per cent and 7.5 per cent respectively. Average prices in England rose 5 per cent in the year, to £244,000 while Wales saw house prices increase by 5.4 per cent over the last 12 months to stand at £154,000. The pound opens in Asia this morning at USD1.3875, GBP/AUD1.7665 and GBP/NZD1.9075.

Tuesday was the first day for while that the DJIA didn’t move at least 500 points from peak to trough. It’s a reflection of just how much volatility we’ve seen recently that a 250-point high-low range seems very quiet indeed. Although stock index futures remained in the red through most of the European and North American trading sessions – moving only into the green in the last couple of hours – it was a poor day for the US Dollar whose index against a basket of major currencies fell more than half a point to 89.30; its lowest level since last Wednesday. Nearly all the losses were accounted for by the movements in EUR and GBP, whilst the USD actually eked out a small gain versus the CAD.

We commented here yesterday that the US small business federation NFIB had reported breathlessly on its December survey of members. Yesterday, it outdid itself after its optimism index jumped a further two points to 106.9. “Main Street is roaring,” said NFIB President and CEO Juanita Duggan. “Small business owners are not only reporting better profits, but they’re also ready to grow and expand. The record level of enthusiasm for expansion follows a year of record-breaking optimism among small businesses. Amongst the various sub-indices, ‘Now Is a Good Time to Expand’ registered at 32%, the highest level in the history of the NFIB survey, which began in 1973. ‘Actual Earnings’ climbed up 11 points from December, the highest level reported since 1988. ‘Plans to make Capital Outlays’ jumped up two points, and ‘Plans to Increase Inventories’ gained four points. There’s no disguising where the NFIB’s political allegiances lie. “The historically high index readings over the last year tell us small business owners have never been more positive about the economy… This is in large response to the new management in Washington tackling the biggest concerns of small business owners – high taxes and regulations.”

Behind the headlines and the political lobbying, the NFIB survey raised a few warning flags for any bond investors who actually bothered to read it. Reports of higher worker compensation rose 4 percentage points to a net 31%, the highest reading since 2000 and among the highest in survey history. 22% (up 3 points) selected “finding qualified labor” as their top business problem, the highest reading since 2000, the peak of the last expansion. Plans to raise compensation rose 1 point in frequency to a net 24% in response to tighter labor markets, the highest reading since 1989. Small firms are raising compensation to attract and keep the employees they need. The focus for most analysts will of course be Wednesday’s CPI data where the headline figure is expected to be up +0.3% m/m to take the annual rate down from 2.1% to 1.9%. The USD index opens in Asia this morning around 89.35.

After four consecutive days stuck on a 1.22 ‘big figure’, EUR/USD finally moved up to 1.23 on Tuesday and, in doing so, took top spot in our one-day currency performance table. It did so on a day when there were no fresh economic data and amidst a total radio silence from the ECB who had no speakers after the talk-fest of the last couple of weeks.

Lovers of detailed economic statistics found plenty to pore over in a 100-page monthly document from the EU agency Eurostat which released its less than snappily titled, “Data for Short-term Economic Analysis”. This enables cross-country comparisons of the whole EU as well as the Eurozone but in truth is a very dull and dry publication with nothing in the way of policy clues. More interesting was a video interview with President Mario Draghi published on the ECB’s website in which he answered questions from the public. Speaking about cryptocurrencies and Bitcoin, he said, "Many of you posted questions about whether the ECB is going to ban Bitcoins or it's going to regulate Bitcoins. I have to say it's not the ECB's responsibility to do that.” He cited high volatility and the fact that it was not backed by any Central Bank or Government as reasons to be very cautious, stating proudly instead that “a euro today is the same as a euro tomorrow”.

A euro today might well be the same as a euro tomorrow, but Mr. Draghi is tasked with ensuring that its purchasing power falls by 2% a year; something his very polite interviewer failed to take him to task on! Today we’ll see final CPI figures for Germany which will show that Mr. Draghi is failing to cut the euro’s value quickly enough; prices there are expected to have risen only 1.4% over the past 12 months. His ECB colleagues Weidmann and Mersch are due to give speeches on Wednesday whilst we’ll also get to see the more detailed breakdown of Q4 GDP. Ahead of all this, the EUR opens in Asia at USD1.2355, AUD/EUR0.6360 and NZD/EUR0.5890.

The Canadian Dollar seems to be off the radar as far as international investors are concerned. On each of the last four trading days, USD/CAD has briefly broken through the upper end of its 2018 trading range from the mid 1.22’s to the high 1.25’s but on each occasion the rally has faded and quickly reversed. As attention switches away from an almost exclusive focus on the stock market, however, investors are beginning to pay a bit more attention to oil prices. WTI crude is down from a recent high of $66.50 per barrel on January 25th to just under $59.15 today; having printed as low as $58.60 on Friday. The CAD may need support from higher oil prices if it is not to break more decisively above the year-to-date range.

Speaking at a White House event on his new infrastructure proposal on Monday evening, US President Donald Trump complained about Canadian trade practices. “We lose a lot of money with Canada. Canada does not treat us right in terms of the farming and the crossing the borders… So, they’ll either treat us right or we’ll just have to do business really differently… We cannot continue to be taken advantage of by other countries.” It was not at all clear what the President meant by “the crossing the borders” or by “the farming.” On NAFTA specifically, Trump said he is willing to give his negotiators time to work rather than quickly initiating a withdrawal from the agreement, though he then suggested immediately that he is not worried about the possible harm of a withdrawal. “Hopefully the renegotiation will be successful. And if it’s not, we’ll be more successful”. No wonder currency traders are confused what to make of this…

Today we’ll get to see the always excellent monthly house price data from Teranet which breaks down the figures by 11 metropolitan areas, as well as nationally. In December, house prices rose 0.2% m/m to take the annual rate of growth to 9.1% nationwide. The Canadian Dollar opens in Asia this morning at USD/CAD1.2600, AUD/CAD0.9900 and NZD/CAD0.9165.