Overview
Markets traded sideways with little direction on Friday awaiting the US CPI and retail sales data. When released the results were mixed; CPI figures rebounded for April (up 0.2%) although year-on-year at 2.2% lower than an expected 2.3%. April retail sales were lower than forecasted, up 0.4% (expected 0.6%) raising some concerns that Q2 is not seeing continuing positive momentum. With confidence knocked on the data release, US equities and the US dollar moved lower as speculation weakened around the odds of a June Fed rate hike. However it should be pointed out that the numbers weren’t that bad, they just failed to be as good as anticipated and we believe that the Fed is still on course for a June rate hike.
Housing starts and Industrial production data for April due out later tonight should reaffirm this track. Chinese data releases were also mixed, with retail sales coming in better than expected at 10.7% yoy but industrial production lower at 6.5% yoy against expectations of 7.1%. This was negative news for the Australian dollar, which yesterday again backed away from the AUD/USD 0.7400 level. Overnight has seen all major US equity markets rising to new highs as energy, financial and materials shares posted solid gains as crude oil prices jumped 2% as Russia and Saudi Arabia, two of the largest producers, announced that they would extend by 9 months, a production output cut deal already in place.
Australia
After last week’s budget consumer confidence has plunged to its lowest level in nearly two years. The ANZ-Roy Morgan Consumer Confidence Index for the week to May 16 has slumped 2.6 points to 109.4, which is its lowest level since September 2015, although the indicator still remains above the 100-point level separating optimism from pessimism. However wages data tomorrow is expected to provide little relief, with private sector wages growth expected to show record low wages growth of just 1.7 % in the year to the March quarter. The rise in crude oil and gold prices over the last 2 days has helped push the AUD/USD back over the 0.7400 level, but given the disappointing Chinese data regarding increasing iron ore stockpiles (up by nearly 2%) and prices continuing close to all-time lows , the Aussie dollar remains the worst performing of G-10 currencies for the quarter. RBA minutes just released, show that the RBA still has concerns over the housing and labour market, which they comment requires “careful monitoring”. However they were more optimistic around core inflation which they saw rising to the expected 2% level by early March 2018. The AUD/USD is currently around 0.7420 with solid resistance at 0.7455, a break of this level would target 0.7475 then 0.7500. Conversely , a pullback below 0.7400 would expose 0.7365.
New Zealand
The New Zealand dollar suffered in the wake of last Thursday’s Reserve Bank statement, but since then a consolidative tone has emerged. The RBNZ, it seems, are in no hurry at all to even talk about raising rates and they view the risks to the outlook as balanced. Most economists however feel the central bank will be forced into upgrading their economic outlook over the coming months, and they could well end up hiking interest rates as early as the first half of next year. That expectation was only underscored by yesterday’s retail sales data that came in much stronger than expected. Sales increased 1.5% on the quarter, up from 0.6% prior. The market had been expecting a gain of 1.1%. Tonight we have another Global Dairy Trade auction which will also be closely watched. With the underlying strength of the NZ economy it’s hard to get too bearish on the NZD. At worst it’s likely to remain range bound as the RBNZ’s current neutral stance helps to limit any significant gains.
United States
Overnight data releases were mixed, but the market concentrated on the oil rebound as equities pushed to new record highs also helped by continued solid corporate earnings results. Industrial production figures for April out later tonight will have more import and are expected to show an increase of 0.4%, just below the 0.5% increase recorded for March. Politically with the Trump administration still reacting to the FBI Director Comey dismissal, the chances of tax reform and infrastructure appear to be more delayed as precious political capital is used up in other debates. The USD has been on the back foot over the last two days as last Friday’s disappointment over inflation and retail sales gathered momentum. Building permits and housing starts are due out in the US tonight, along with the industrial and manufacturing production figures which if solid, as expected, should give the USD a floor to rally from. Although some data has been mixed, in our view none of it has been against the overall trend of an improving US economy and we remain confident that the Fed will look through such data to the general supportive trend for a rate increase in June.
United Kingdom
The UK election campaign grinds on with all pointers indicating that the ruling Conservatives will retain power with an increased majority. After last week’s downgrade of growth by the BoE, UK markets have generally shrugged off this effect and the week has opened with the GBP back over 1.2900 against the USD and the equity markets rallying with the FTSE 100 at a new record high fuelled by a bounce in mining and oil stocks. This week will see the release of inflation data and April employment figures and it appears that the market is in wait-and-see mode ahead of this data, if good,, a push back over resistance at 1.2960 is likely towards GBP/USD 1.3000 a break of this level would trigger stops and see an extension to 1.30600 region. Conversely a fall below 1.2900 would target 1.2865.
Europe
Not much data out for the Eurozone this week, apart from Q1 GDP figures tonight and ECB meeting minutes on Thursday so attention is swinging back to election activity and the retreating of political risk. Germany is currently the focus with the success of Angela Merkel’s party in North Rhine-Westphalia would be positive for the Euro, as the chance that Merkel will retain her chancellorship should give the Euro and the Eurozone a confidence boost. A report published by the German economic ministry, out yesterday, struck an upbeat note. It commented that employment levels were continuing to rise, order levels in the industrial sector remained strong, the construction sector upturn remained solid, all pointing to solid economic growth over the next 3 months. The result of the French election looks to have been the turning point for the EUR as political risk in the Eurozone fades and turmoil in the US administration starts to affect the US fiscal agenda bringing a weaker tone to the USD. The EUR/USD has traded up as high as 1.0988 over the last few days, is now at 1.0984 with a break of the 1.1020 level extending to 1.1060.
Japan
The Japanese Yen initially pushed through 113.80 after the weekly open but was soon back at 113.30 with risk appetite driving market movements. Japanese Producer figures posted a gain of 2.1% against the estimated 1.8% Monday showing improvement in 10 straight releases but oddly yen failed to respond. GDP numbers are released Thursday along with a slew of Japanese earnings. Support is still at 113.00 with short term resistance 114.00.
Canada
The Canadian Dollar continues to strengthen across the board pushing off highs against the US Dollar on the weekly open to trade back at 1.3600 Monday. Risk has been to the upside during US trading sessions, with oil bouncing off the lows to trade back close to 50.00 per barrel based on discussions to cut global supply. The Canadian Dollar has taken advantage of risk appetite making a move towards 1.3550. Downside risk stands at 1.3520 with resistance at 1.3780 coming into Manufacturing Sales Thursday with Core monthly CPI later in the week.
Major Announcements
• RBNZ leave rate unchanged at 1.75%
• UK Manufacturing Production -0.6% vs -0.2% expected
• Bank of England leaves rate unchanged at 0.25%
• USD PPI 0.5% vs 0.2% expected
• US CPI 0.2% vs 0.3% expected
• US Core Retail Sales 0.3% vs 0.5% expected
• NZ Retail Sales 1.5% vs 1.1% expected
• Chinese Industrial Production 6.5% vs 7.0% expected