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US stocks and Dollar both lower ahead of CPI data. EUR is strongest on the day so far

By Nick Parsons

Volatility in US equity markets now seems a permanent feature of the investment landscape. Even on Monday when the DJIA finished little changed on the day, the index had risen 400 points then given back the whole of its gains in the last two hours of trading. Against this background, the performance of the US Dollar looks pretty tame. On Tuesday, the USD index against a basket of major currencies rose from 89.45 to 89.55 in early trading but then fell steadily during the day to 89.25 having at one point reached a near-one week low of 89.15. Overnight in Asia and this morning in Europe, the USD is steady just below this level but although it looks technically weak and could easily break down on to an 88 ‘big figure’, it would still mean that its entire range over the last 3 weeks has been less than 1¼ points.

Speaking on Bloomberg television from Beijing yesterday, Federal Reserve Bank of Dallas President Robert Kaplan said trade issues between the U.S. and China won’t get resolved soon and warned of potential damage if the dispute is prolonged. “I really do think it is too early to judge how this is going to affect the economy. But I do think the rhetoric, if it goes on for long enough at this level, is having somewhat a chilling effect… I’m still hopeful when we look back a year or two from now you’ll see very little actually done in the way of tariffs that were implemented,” Kaplan said. “That would be my base case, and I think we are in the early innings of this.” Equity markets will hope very much that his judgment proves correct.

As well of the Minutes of the March FOMC meeting during the afternoon, this morning brings the latest US inflation figures. Consensus expectations are for the headline rate to edge up from 2.2% to 2.3% with the core, ex-food & energy, measure seen rising from 1.8% to 2.1%. The Federal Reserve Bank doesn’t have a CPI target – instead, it focuses on PCE – but numbers above 2% for both the headline and core will cement expectations of further monetary policy tightening whatever the huge day-to-day swings of the US stock market. The USD index opens this morning in North America around 89.00.

It was almost a three-way split at the top of our leaderboard on Tuesday, though the Canadian Dollar was ultimately just edged out by both the AUD and NZD. On Monday, USD/CAD printed on a 1.26 ‘big figure’ for the first time since late February. Just 24 hours later, it moved on to 1.25 for the first time since February 20th. The strength of the CAD dragged the GBP/CAD cross rate down to a low of 1.7840; its weakest since March 13th though it has recovered around half a cent during today’s European morning session.

After Monday’s very healthy BoC Business Outlook Survey, the focus yesterday switched towards the housing market. January’s building permit numbers had been unusually strong with a 5.6% m/m gain so it was always likely that the February numbers would show some pullback. The outturn was that Canadian municipalities issued $8.2 billion in building permits in February, only a 2.6% m/m drop. Single-family homes, as well as the commercial and institutional components, saw lower levels of construction intentions. The total value of building permits decreased in six provinces in February. The largest declines were in Quebec and Ontario, while Alberta reported the largest increase followed by Manitoba. A separate report from the Canada Mortgage and Housing Corp said housing starts slowed slightly in March. The seasonally adjusted annual rate of starts declined to 225,213 in March from February’s upwardly revised 231,026 had forecast a sharper decline to 218,000 homes.

More data on housing comes later this week, with the next BoC monetary policy meeting next Wednesday. Before then, Thursday brings new home prices and Friday is nationwide home sales. The Canadian Dollar opens in North America at USD/CAD1.2610, AUD/CAD0.9770 and GBP/CAD1.7890.

The Single European Currency finished around the middle of the FX pack on Tuesday, up against the USD, little changed against the GBP but down against all three of the ‘Commonwealth Currencies’. EUR/USD opened around 1.2320 and after a very steady session through Asia and the European morning, then took off to a high of 1.2370 before then settling back to 1.2345 after an unusually public spat between ECB Council member Ewald Nowotny and his colleagues. Overnight in Asia and this morning in Europe, the EUR is once more probing Tuesday’s highs.

In very uncontroversial and pretty dull early remarks, Mr Nowotny said, “The normalisation [of monetary policy] requires a delicate balancing of measures as well as careful sequencing in time,” saying there were risks to both being too aggressive with the process or starting it too late. As for the impact of trade tariffs, “The direct effects might be on the exchange rate side but this is difficult to see or to forecast because today we have so many linkages, we have long production chains...It might have negative effects on financial stability, but effects on monetary policy are not very clear.” However, the Austrian central banker then gave an interview to Reuters in which he said that the ECB’s 2.55 trillion euro ($3.1 trillion) bond-buying program would be wound down by the end of this year, which would then pave the way for the first rate rise since a fumbled move in 2011. He called on the ECB to get on with the process to ensure it can take a gradual approach and to start with the deposit rate, which has been in negative territory since mid-2014. “I would have no problem with moving from -0.4 percent to -0.2 percent as a first step and then, as a second step, include the (main refinancing) policy rate. This is the structure. The exact timing? It’s too early to tell you.”

In a very unusual move after EUR/USD had jumped around half a cent, the ECB - which rarely comments on statements from individual policymakers - distanced itself from Nowotny’s comments. “Governor Nowotny’s views are his own. They do not represent the view of the Governing Council,” an anonymous spokesperson said. ECB Members Nuoy and Hakkarainen are scheduled to speak today and analysts will be watching to see if they deliberately distance themselves from Mr. Nowotny’s remarks. The EUR opens in North America today at USD1.2365 and EUR/CAD1.5600.

The British Pound had another day of very mixed fortunes on Tuesday, rising against the USD, little changed against the EUR but down between four and five-tenths of a point against the CAD, NZD and AUD. The GBP/USD exchange rate reached a best level of 1.4185 – its highest in almost two weeks – but GBP/AUD and GBP/NZD both fell a full cent on the day. Overnight in Asia, the Pound extended its gains to 1.4210 before a softer-than-expected set of industrial production figures.

Figures released by the Office for National Statistics this morning showed that in February, total production increased by just 0.1% compared with January’s level; energy supply provided the largest upward contribution, increasing by 3.7%. Manufacturing production declined by 0.2%, the first time output has fallen since March 2017 and the ONS noted that, “within this sector 7 of the 13 sub-sectors decreased on the month”. January’s previously-reported +0.1% m/m increased was revised to flat. Taking the last 3 months together, total industrial production was down -0.1% compared to the previous 3-month period, whilst manufacturing output was up 0.6%. Separate figures on the construction sector showed output fell by 1.6% m/m in February, largely due to a 9.4% decrease in infrastructure new work. Compared with February 2017, construction output fell 3.0%; the biggest year-on-year fall since March 2013. The ONS said it had received some anecdotal information from a small number of survey respondents regarding the effect of the snow on their businesses in the final week of February 2018. The adverse weather conditions across Great Britain could have potentially contributed to the decline in construction output, although it was difficult to quantify the exact impact on the industry.

At noon UK time today, we saw the NIESR’s estimate of GDP in the first quarter of the year. The National Institute has had a very good record over the last few years of predicting the official GDP numbers and it is updated every month with an estimate of growth over the previous three months. Today is one of the four occasions each year when its estimate lines up in time with the official numbers. The NIESR reports that, “We estimate that economic growth nudged lower to 0.2 percent in the first quarter of 2018. The main reason for the weakness was severe weather in March which is likely to have disrupted activity in all major sectors of the economy.” This was below consensus estimates for a 0.3% q/q increase and is also below what the BoE was assuming in its latest Inflation Report. The British Pound opens in North America this morning at USD1.4190, GBP/EUR1.1465 and GBP/CAD1.7895.

The price action for the AUD/USD pair on Tuesday was quite striking – it made successive highs in the Asian, European then North American time zones. Asia saw the pair rally from 0.7695 to 0.7735. Europe then took it up to 0.7745 and in New York it traded just over 0.7765; its highest level since March 22nd. With AUD/NZD steady at 1.0635, the Aussie Dollar shared top spot with its Kiwi cousin at the top of our one-day performance table. Overnight in Asia and this morning in Europe, the AUD has been unable to hold on to Tuesday’s best levels and is down – albeit only slightly – against all the major currencies we follow closely here.

In economic news today, the Melbourne Institute and Westpac Bank survey of 1,200 people showed its index of consumer sentiment dipped 0.6 percent in April, from March when it rose 0.2 percent. Sluggish wage growth, rising living costs and high levels of household debt have been weighing on the consumer mood, offsetting broad-based strength in employment. The concerns showed in a sharp 5.8 percent drop in the survey's index of family finances over the next 12 months, which outweighed gains in all the other measures. The survey's barometer of economic conditions over the next 12 months edged up 0.6 percent and the outlook for the next five years bounced 2.9 percent.

Commenting on the data, Westpac said, “Sentiment continues to hold in slightly optimistic territory with April marking the fifth consecutive month the Index has been above the 100 level, indicating optimists outnumber pessimists. That is a more encouraging signal than we saw in most of 2017 when pessimists outnumbered optimists. However, the 10% rally we saw in the Index through the second half of 2017 has stalled. Indeed, since the beginning of the year the Index has fallen by around 2.5%. Certainly, at 102.4 the Index is still well below the strong 105–115 levels typically associated with a robust consumer. The Reserve Bank Board next meets on May 1.There is little chance of a move by the Board at this meeting. Indeed, markets which six months ago were fully priced for a rate hike by August 2018 are now not priced for a move until mid- 2019. Westpac continues to expect the cash rate will remain on hold through 2018 and 2019.” The Australian Dollar opens in North America this morning at USD0.7750, with AUD/NZD at 1.0525 and AUD/CAD0.9770.

Having shared top spot with the Canadian Dollar on Monday, the New Zealand Dollar shared the same place with the Aussie Dollar on Tuesday. The AUD/NZD cross traded in a range from 1.0515 to 1.0555 but finished the day pretty much where it had begun at 1.0535. NZD/USD, meantime, extended its gains to a high of 0.7375; its best level since February 19th whilst the GBP/NZD cross hit a low just below 1.9120; its weakest since mid-March. NZD/CAD fell to a near 6-week around 0.9260.

In economic news today, ANZ released its wonderfully-named Truckometer index. ANZ say this is a set of two economic indicators derived using traffic volume data from around the country. Traffic flows are a real time and real-world proxy for economic activity - particularly for the New Zealand economy, where a large proportion of freight is moved by road. It represents an extremely timely barometer of economic momentum. The ANZ Heavy Traffic Index shows a strong contemporaneous relationship to GDP, while the ANZ Light Traffic Index has a six month lead on activity as measured by GDP. Their latest update shows, "The Heavy Traffic Index fell 0.3% m/m in March, to be down 0.7% for the quarter. This isn’t a strong signal for GDP growth, but the index has been volatile lately. With anecdote suggesting a decent quarter, we will wait for more pieces of the GDP puzzle before drawing any conclusions. On the other hand, the Light Traffic Index bounced 2.2% m/m, after a few months of fairly lacklustre performance. This index is giving a softer signal for growth from mid-year, but the bounce-back is encouraging."

The RBNZ announces on its website that Assistant Governor and Head of Economics John McDermott will deliver a speech on Thursday titled “Inflation targeting in New Zealand: an experience in evolution.” We’ll also get the March credit card spending numbers. The Kiwi Dollar opens in North America at USD0.7365 and NZD/CAD0.9285.