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Lots of Fed speakers today, as well as data on US industrial production. USD steady, but nervous

By Nick Parsons

The US stock market had another good day on Monday with the DJIA up over 200 points and the S&P 500 index more than 20 points higher as worries over a possible escalation of the Syrian missile crisis seemed to quickly fade. The Tuesday morning session in Europe has been pretty kind to equities too, with another half percent on both main US indices and the S&P 500 approaching 2700 for the first time since March 22nd. The US Dollar, however, has performed much less well. Its index against a basket of major currencies closed last night around 89.00 but traded down overnight to test 88.80; its lowest in three weeks. It subsequently recovered a little as GBP/USD fell around half a cent from its high but is struggling to hold on to an 89 ‘big figure’.

Kicking off a busy week of a dozen Fed speakers, Federal Reserve Bank of New York President William Dudley popped up on CNBC to say the central bank will stay on its gradual path of raising interest rates unless inflation moves up by an appreciable margin. “I don’t think we know exactly how many more rate hikes we are going to do this year… As long as inflation is relatively low, the Fed is going to be gradual. Now, if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.” On the speaking circuit today, we have Williams, Quarles, Harker, Evans and Bostic and though not all of these are on the topic of monetary policy, the unscripted Q&A sessions can often offer insights not given in the prepared text. In separate Fed news, President Donald Trump is expected to nominate Pimco executive Richard Clarida as vice chair of the Federal Reserve and Michelle Bowman, Kansas bank commissioner, who the president picked for an open governor's spot. Bowman's seat is reserved for a community banker or community bank regulator. Both nominees must be confirmed by the Senate before taking up their respective roles.

After Monday’s data on retail sales and business inventories, the Atlanta Fed updated its model forecast of Q1 GDP. Previously estimated at 2.0%, this has been downgraded slightly to 1.9% which is close to the lowest it has been over the last three months. Recall that the very earlier estimates started around 5% and have been progressively moved lower as incoming economic data have tended to surprise to the downside; a feature not just of the US economy, but also those in the UK and Eurozone. After today’s numbers on housing starts, industrial production and capacity utlilisation are released, there will be a further update to the model later this afternoon. The USD index opens this morning in North America around 89.10.

The Canadian Dollar continued its good run on Monday, almost tying with the EUR for second place in our one-day table and gaining ground against the AUD, NZD and US Dollars. From a high around 1.2625 at the end of the Asian session, USD/CAD then fell all the way down to 1.2565; barely 10 pips above last Friday’s 2-month low. The Canadian Dollar could not keep pace with the strength of the pound, however, and GBP/CAD moved back on to a 1.80 ‘big figure’ for the first time in a week; reaching a high just above 1.8040. This morning in Europe, USD/CAD has been in a 20 pip range from 1.2555 to 1.2575 without any fresh directional impetus.

In political news, Canadian Prime Minister Justin Trudeau has been forced to intervene in a dispute between the provinces of British Columbia and Alberta over plans to expand an existing pipeline and lay nearly 1,000km of new pipe from Alberta’s oil sands to the Pacific coast. The political stalemate over the C$7.4bn project became a national issue last week after contractor Kinder Morgan Canada announced it would walk away from the project unless it saw a clear path to completion by the end of May. Mr.Trudeau and his Liberal government came into office in 2015 on promises to strike a balance between economic growth, environmental concerns and repairing the country’s fraught relationship with indigenous peoples. The move by Kinder Morgan Canada, which was spun off by its U.S. parent last year, puts pressure on Trudeau to solve the problem without alienating voters in British Columbia or presiding over an investment failure ahead of 2019 elections. It is a delicate balancing act and one which could at the very least cast some doubt over the durability of the Canadian Dollar’s recent rally should it escalate from a domestic concern to gain more international attention.

The Bank of Canada holds its monetary policy meeting tomorrow having already hiked rates three times since July 2017. Economists from 10 of the 11 primary dealers of Canadian government securities told the Wall Street Journal they anticipate the BoC will keep its key rate at 1.25% this week. Morgan Stanley is one of the dissenting voices saying “We expect the Bank of Canada (BoC) to raise interest rates at its April meeting by 25 basis points, to 1.5 per cent… Data on economic activity have thus far come broadly in line with the BoC’s expectations, opening a window for the governing council to deliver a second rate hike this year. We expect the data will soon begin to disappoint relative the BoC’s expectations and, as such, we look for the BoC to pause on hikes thereafter in order to assess the effects of policy tightening, and we continue to expect no further rate hikes until next year.” So, even though, they are forecasting a rise in rates, this is what in currently-fashionable terminology might be termed a ‘dovish hike’. The Canadian Dollar opens in North America at USD/CAD1.2565, AUD/CAD0.9780 and GBP/CAD1.8005.

After a quiet start on Monday, EUR/USD began to rally quite sharply and by early afternoon had gained more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. During the European morning today, the euro extended its gains to 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than a quarter of a cent to settle in the high 1.23’s with EUR/CAD also more than 25 pips off its 1.5885 high.

In economic news, the ZEW Indicator of Economic Sentiment for Germany once again fell sharply, dropping by 13.3 points compared to March and a huge 26.0 points when compared to February. The April indicator stands at minus 8.2 points, falling far below the long-term average of 23.5 points. The assessment of the current economic situation in Germany decreased by 2.8 points, with the corresponding indicator currently standing at 87.9 points. Commenting on their survey, the ZEW said, “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.” The financial market experts’ expectations regarding economic development in the Eurozone also decreased considerably, with the indicator falling by 11.5 points to a current reading of just 1.9 points. The indicator for the current economic situation in the Eurozone improved slightly in April by 1.5 points to 57.7.

According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020. The EUR opens in North America today at USD1.2370 and EUR/CAD1.5555.

The British Pound had a very good day on Monday, rising against all the major currencies we follow here. Its’ gains ranged from 0.2% against the EUR to 0.4% against the AUD and 0.6% versus the US Dollar. Having finished the day at a post-EU referendum high around 1.4340, GBP/USD was very steady in a tight range in the Asia session overnight before spiking up to a fresh peak of 1.4375 early in the London morning. It has subsequently fallen around half a cent as incoming economic data failed to live up to some heady expectations.

According to the Sunday Times at the weekend, “figures out on Tuesday are expected to show that average wages in February climbed 3% on a year earlier, the first time pay growth has outpaced the rise in consumer prices since January last year.” It was only half-correct in its view. Average earnings growth did, indeed, exceed inflation but the 2.8% y/y increase in February was only one-tenth above the 2.7% rise in the CPI. The good news is that pay is now growing at its fastest pace since August 2015 but the end of a squeeze on real living standards is still a very different thing to a noticeable and sustained improvement in purchasing power. And, with increases in mandatory pension contributions for many people effective in April, the benefit of higher headline wages will not be matched in take-home pay.

Separate figures on the labour market, meantime, show that the unemployment rate in the UK has hit a 42-year low of 4.2%. The number of people classed as unemployed has dropped by 136,000 over the last year, and now stands at 1.42 million whilst there are now 32.26 million people in work, 427,000 more than a year ago. This means the employment rate has hit 75.4%, the highest since records began in 1971. The Government was quick to highlight the numbers. The Secretary of State for Work and pensions said, “Another milestone for employment has been reached under this Government as employment reaches a record high, up 3.2 million since 2010 - the 16th time the employment record has been broken in the same period. That means on average, over 1,000 people have moved into work every day since 2010.” The British Pound opens in North America this morning at USD1.4315, GBP/EUR1.1570 and GBP/CAD1.8000.

After its choppy day on Monday, the Australian Dollar is still struggling to gain traction in either direction, doubtless frustrating many intra-day traders. It closed little changed at USD0.7775 yesterday evening and this morning has been down almost to 0.7760 then up to 0.7790 to be back pretty much where it began. The Aussie appears unsure whether to take its cue from improving sentiment in global equity markets and lower levels of volatility, a somewhat lower gold price, or continued caution from the Reserve Bank on the pace of progress towards its inflation and output goals. Both AUD/USD and AUD/CAD have been stuck within 30 pip ranges for the whole of the last 24 hours.

The RBA Board Minutes offered no great surprises, though your author was struck by a few phrases which could be interpreted quite dovishly. Most notably, the conclusion that, “In current circumstances, members agreed that it was more likely that the next move in the cash rate would be up, rather than down” is an explicit mention of the possibility of a cut in rates, even if it is the ‘straw man’ to be set up and then knocked over. Certainly, there was no sense of urgency in changing monetary policy. “Forward-looking indicators suggested that spare capacity in the labour market would continue to decline gradually over 2018. Consequently, wages growth was expected to rise gradually from its current low rate. Low growth in labour costs in combination with strong competition in the retail sector suggested that inflation would remain low for some time before also picking up gradually as the economy and labour market strengthen.”

The RBA noted that, “The low level of interest rates had supported growth over 2017, which had reduced the unemployment rate and brought inflation closer to the target. Further progress on these goals was expected in the period ahead, but this progress was likely to be gradual. Over 2018, GDP growth was expected to exceed potential growth and CPI inflation was expected to increase gradually to be a little above 2 per cent. Members noted that an appreciation of the Australian dollar would be expected to result in a slower pick-up in economic activity and inflation than forecast.” Eagle-eyed readers will have spotted the use of the word ‘gradual’ five times in just two paragraphs! It should not be difficult for markets to take the hint, whilst anyone expecting a rate hike any time soon will be left in an even more uncomfortable position now. The Australian Dollar opens in North America this morning at USD0.7775, with AUD/NZD at 1.0590 and AUD/CAD0.9775.

The New Zealand Dollar had a disappointing session in Asia on Monday but then regained all its losses against the USD, even if it remained lower against all the other major currencies we follow closely here. NZD/USD fell from 0.7355 to a low at lunchtime in Europe of 0.7335 but by the time European traders headed home, it had bounced back to 0.7365. Overnight the pair slipped to once again test Monday’s low and the Kiwi Dollar is in bottom spot on our one-day performance table with NZD/CAD hitting a 7-week low around 0.9225.

In economic news today, the Real Estate Institute of New Zealand (REINZ) said that the median house price for New Zealand rose 1.8% in March 2018 to reach a new record high of $560,000 up from $550,000 in March 2017. Prices in Auckland fell 2.2% year-on-year to $880,000 but this was compared to March 2017 which saw the region experience the record price of $900,000. The REINZ said, “March was a very strong month from a price perspective with record prices achieved for New Zealand, New Zealand excluding Auckland, Gisborne, the Hawke’s Bay and Wellington. Looking at the whole country, median house prices increased in 13 out of 16 regions.” The number of properties sold in March across the country fell by 9.9% when compared to the same time last year with 7,768 properties sold in comparison to 8,622 in March 2017 which was the highest month for sales volume in 2017.

The International Monetary Fund has criticized New Zealand’s ban on home sales to foreigners, saying it’s unlikely to improve housing affordability. After concluding its annual Article IV mission to New Zealand, the IMF said that, “Foreign buyers seem to have played a minor role in New Zealand’s residential real estate market recently... If the government’s broader housing policy agenda is fully implemented, that would address most of the potential problems associated with foreign buyers on a less discriminatory basis.” Proposed changes to the Overseas Investment Act, which the government says will bring New Zealand into line with neighboring Australia, will classify residential land as “sensitive,” meaning non-residents or non-citizens can’t purchase existing dwellings without the consent of the Overseas Investment Office. While non-resident foreigners will be allowed to invest in new construction, they will be forced to sell once the homes are built. Elsewhere in the report, the IMF notes that economic growth should remain around 3 percent in the near term, with risks broadly balanced and on monetary policy it warns against both precautionary further easing or premature tightening. The Kiwi Dollar opens in North America at USD0.7345 and NZD/CAD0.9225.