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Stocks and US Dollar steady. GBP hit by soft retail sales, AUD boosted by commodity prices

By Nick Parsons

Stock markets have calmed down a little in the last few sessions, though whether this marks a return to more ‘normal’ market conditions or is just a temporary respite remains to be seen. The S&P500 index has settled on to a 2700 handle though the Dow Jones Industrial Average hasn’t yet managed to regain the 25,000 level which it last saw on March 14th. The US Dollar index has this week traded in a range from 88.80 to 89.45 and though it is currently in the upper half of this band, there appears no great enthusiasm to chase it much higher.

President Trump clearly enjoyed his time on the golf course at Mar-a-lago with Japanese Prime Minister Shinzo Abe and his Twitter feed has been fulsome in its praise of the friendship and co-operation between the two nations. For the moment, at least, there has been no time for distractions on Russia, Syria, China, tariffs or trade. It was a notable feature of yesterday’s Fed Beige Book that contacts in nine of the dozen Fed regional banks expressed concerns about trade tariffs — with 36 mentions of the word in the report, whilst business owners were upset with the price rises for metals in the wake of the Trump administration’s decision to place penalties on steel and aluminum imports. Elsewhere the report noted activity remained at “a modest to moderate pace” in March and early April, the same rate as earlier in the year. Overall wage growth was said to be modest, and price gains seen as moderate. Wage pressures “did not escalate,” although labor markets were seen as tight, with continued reports of shortages for high-skilled workers.

There are only second-tier US economic statistics scheduled for release today: the Philadelphia Fed Business Survey and the weekly initial jobless claims data. These have recently been distorted by the timing of Easter and it may take another couple of weeks before we get a ‘clean’ read on the numbers. The USD index opens this morning in North America around 89.25.

We wrote here yesterday morning that, “it seems investors have begun to lock-in profits on long CAD positions ahead of today’s Bank of Canada policy meeting.” They will certainly be glad if they did as the Canadian Dollar slumped to the bottom of our one-day performance table on Wednesday. USD/CAD rose from a low immediately prior to the interest rate announcement of 1.2555 to a high just under 1.2660. AUD/CAD jumped more than three-quarters of a cent to 0.9845 whilst NZD/CAD rose from 0.9200 to a best level just under 0.9270. Overnight in Asia and this morning in Europe, the CAD has improved from its worst levels though USD/CAD has not yet been able to break back down on to a 1.25 ‘big figure’.

As expected by the vast majority of analysts, the Bank of Canada left its overnight target rate of interest unchanged at 1.25%. Its Statement noted that, “interest rates remain very low relative to historical experience. This is because the economy is not yet able to remain at full capacity on its own. Furthermore, the sustainability of this level of activity is not assured; although we expected the economy to moderate in the second half of 2017, that moderation has extended into early 2018 and has been more pronounced than expected.” Blaming this on two exceptional factors – changes in mortgage rules and transport bottlenecks – the BoC said, “Accordingly, we expect a strong rebound in the second quarter after a lacklustre first quarter, with an average growth rate of about 2 percent in the first half of the year and a return to near-potential growth thereafter. Fiscal stimulus, both provincial and federal, is playing a role in this forecast. We will be monitoring the data for the second quarter very closely in the weeks ahead.”

In terms of forward guidance, and though Governor Poloz personally doesn’t like the concept, the Statement went on to say that, “Assuming our forecast remains on track, it is Governing Council’s view that interest rates will need to move higher over time to keep inflation on target… Most of our deliberations, therefore, concerned the appropriate pace of interest rate increases. As we have said repeatedly in the past, this is an intensely data-dependent process of risk management.” Weighing up the risks around capacity constraints, inflation dynamics, wages and the sensitivity of the economy to interest rates given the high level of household debt, The BoC concluded that, “higher interest rates will be warranted over time… but the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.” The Canadian Dollar opens in North America at USD/CAD1.2620, AUD/CAD0.9835 and GBP/CAD1.7890.

The Single European Currency had a pretty quiet day on Wednesday, within a narrow trading range from USD1.2355 to 1.2395 before closing with no net gain or loss around 1.2375. After a pretty quiet session in Asia overnight, European traders aggressively bid up EUR/USD from 1.2365 to just under 1.2400 but the pair quickly reversed its gains and within an hour was back down at the low of the day around 1.2660.

Eurozone current account data are rarely a market mover and neither Reuters nor Bloomberg even publish consensus estimates for the numbers. Nonetheless, they are an important reminder of why the currency finds solid investor demand, particularly at times of higher volatility and uncertainty in global asset markets. Figures out this morning showed that in February, the Eurozone registered a €35.1bn current account surplus after an upwardly-revised €39.0bn in January. In the 12 months to the end of February, the surplus rose to 3.7% of GDP, up from 3.4% in the same period last year. The ECB expects this trend to continue, pushing the surplus higher to above 4% of GDP later this year and in 2019.

Research published last week by investment bank Jefferies and reported in the Financial Times showed that Eurozone investors have been the biggest overseas net buyers of US debt securities in the past half-decade. Euro area holdings of US corporate and Treasury bonds reached $2.75tn at the end of last year, an 80 per cent increase since the start of 2012. By contrast the volume of US debt held by investors in Japan and China remained flat over the period, while investors in the UK increased their holdings by 40 per cent to $700bn. According to the authors of the report, “European Central Bank quantitative easing has resulted in the recycling of the euro area’s current account surplus into US debt securities.” The EUR opens in North America today at USD1.2360 and EUR/CAD1.5600.

After finishing equal bottom of the table with the New Zealand Dollar on Tuesday, the British Pound looked set to repeat the same dismal performance on Wednesday until it managed to close up against a very out of favour Canadian Dollar. This morning in Europe, the GBP has again fallen victim to more disappointing economic data and as we write this commentary shares is up only against the NZD. GBP/USD reached an overnight high of 1.4215 but after UK retail sales numbers were published, fell to a low around 1.4175; its weakest level since last Thursday and almost 2 cents below Monday’s 1.4365 high.

UK retail sales were always likely to be negatively impacted by very poor weather in the month of March, but the outturn was far worse than consensus estimates of a -0.5% m/m decline. The actual figure published by the Office for National Statistics was a -1.2% m/m drop which meant that total sales volume in the first quarter of the year fell -0.5% and was up only 1.1% compared to a year ago. The statisticians commented that, “Retail sales fell in the first quarter due to a large decline in March with petrol sales seeing a significant slump as a result of the poor weather keeping many shoppers indoors. However, the snow actually helped boost online spending with department stores in particular seeing growth in their web sales… Various shops also reported increased spending on gifts in the run-up to Easter and Mother's Day, which also helped boost online sales."

The question for markets now is whether the soft run of economic activity data in the first quarter of the year, coupled with a sharp fall in the rate of inflation, will be sufficient to deter the Bank of England from raising interest rates at its May MPC meeting. For the moment, investors are still inclined to the view that it will not prevent a hike as this would be too great a loss of face for the Bank and its Governor, Mark Carney. Instead, the MPC will likely reference a lower estimate of the UK economy’s potential non-inflationary growth rate as a reason to raise interest rates, though quite why this should be taken as good news for the GBP remains something of a mystery. The British Pound opens in North America this morning at USD1.42055, GBP/EUR1.1485 and GBP/CAD1.7915.

The Australian Dollar had another mixed day on Wednesday with AUD/USD finishing in New York within 10 pips of its opening level around 0.7775. This morning in Europe has been thankfully more interesting with AUD/USD back on a US 78 cents ‘big figure’ for the first time since last Friday despite a softer than expected labor market report. Investors, instead, seem to be focusing on large gains in commodity prices as a reason to be buying the Aussie Dollar.

The March labor market report was quite a bit softer than had been expected. Total employment rose by just 4,900 against consensus expectations of a 21,000 increase. More disappointingly, February’s initially-reported 17,500 gain was revised to show a drop of 6,300 which brought to an end what had previously been a run of 17 consecutive monthly increases in employment. The main revisions came in full-time jobs which were now estimated to have gained only 20,100 in February, instead of the initial outsized jump of 64,900. March was even worse with full-time positions falling 19,900. The unemployment rate was steady at 5.5 percent, after a downward revision to February. It has hovered between 5.4 percent and 5.6 percent for 11 months now whilst the participation rate dipped to 65.5 percent, having peaked at 65.7 percent in January as more women entered the labor force.

On the Australian stock exchange, the ASX Metals & Mining index hit a three-month high this morning, driven by sharply higher prices for industrial metals. Aluminum is up 32% so far this month and nickel is 20% up this week alone on Russian sanctions and supply shortage concerns. Three-month nickel on the London Metal Exchange rallied as much as 9.3% to $16,690 a tonne today, the highest since December, 2014. Australia’s biggest export commodity, iron ore, meantime, is up 8.5% over the last three days. The Australian Dollar opens in North America this morning at USD0.7800, with AUD/NZD at 1.0665 and AUD/CAD0.9830.

After finishing second from bottom and then bottom of our one-day performance table in the first two days of the week, the Kiwi Dollar improved marginally to third-last on Wednesday; rising against the CAD and GBP but lower against the AUD, EUR and US Dollar. This morning has again not been kind to the NZD, even though inflation figures came out in line with the general consensus. NZD/USD is testing 0.7300 and threatens to move on to a US 72 cents ‘big figure’ for the first time in more than 10 days.

The long-awaited Q1 CPI figures were finally released overnight. In our preview yesterday, we noted BNZ had picked a 0.3% quarterly increase, ANZ had gone for +0.4% and Westpac +0.5%. The prize must go to Westpac who correctly forecast both the quarterly increase and the annual rate of 1.1%; down from 16% in the December quarter. Government-influenced price changes had the biggest impact on the numbers, with higher cigarette and tobacco prices being countered by cheaper tertiary education. The annual tobacco tax increase on 1 January 2018 lifted quarterly inflation, with prices up 10 percent. The average price for packet of 25 cigarettes was $35.14 in March, compared with $31.68 in December. Prices for tertiary education fell 16 percent in the March 2018 quarter. This is the first time this series has fallen since 2003; it was due to the introduction of the Government's fee-free first year policy. The policy applies for all New Zealand secondary students finishing school from 2017 onwards, and adults who previously studied for less than half a full-time year of tertiary education or industry training.

Elsewhere in the comprehensive inflation numbers, higher prices for accommodation services and petrol also contributed to the quarterly CPI rise, but they were slightly offset by seasonal falls for international airfares whilst housing and household utility prices increased 3.1 percent in the March 2018 year, led by construction and rents. Inflation in New Zealand is now close to the bottom of the RBNZ’s 1-3% target range though the Central Bank will probably take some comfort from the fact that tradable prices — those largely determined by offshore factors — fell 0.4% over the year, helping to offset a 2.3% increase in non-tradable prices over the same period. Speaking on NZ radio, RBNZ Governor Adrian Orr said he expected, “very benign inflation going forward without doubt, as we’ve forecast”. He added that “what really matters is the confidence and expectation and belief that we are aiming for that midpoint of 2 percent all of the time.” And he pledged that “we are doggedly determined to aim for two percent, but the accuracy around…that is very limited.” The Kiwi Dollar opens in North America at USD0.7305 and NZD/CAD0.9210.