Weekly Market & Currency Developments – From Our Bankers

Week Beginning May 27 2018

Australia: Business investment and home prices in focus

• A relatively quiet week beckons in terms of new economic data. Home prices, building approvals and business investment are the indicators of most interest.

• The week kicks-off on Tuesday when Roy Morgan and ANZ release the weekly consumer sentiment results.

• On Wednesday, local council building approvals data for April is issued. Approvals to build new homes rose by 2.6 per cent in March. Strong population growth is lifting demand for housing in Victoria. The value of building approvals hit a record high of $126.4 billion over the year. Annual commercial building approvals stand at a record high of $48 billion.

• On Thursday the Australian Bureau of Statistics (ABS) releases the Private Capital Expenditure publication (essentially business investment figures). New investment grew by four per cent over the year – the fastest annual growth rate in five years.

• In the December quarter the future spending plans were also positive. The upgrade in investment plans from the fourth to the fifth reading for the current financial year was the strongest for an equivalent period going back eight years. The other good news is that there is a broad-based lift in actual annual investment spending across the non-mining-focused states and territories.

• Also on Thursday the Reserve Bank releases the monthly Financial Aggregates publication that includes the privatesector credit measure (effectively ‘loans outstanding’).While most attention has been on housing credit growth, business credit posted a welcome increase of 0.8 per cent in March after three consecutive weak prints. Could this be the much-awaited inflection point following a period of strengthening non-mining business investment?

• On Friday CoreLogic releases home price data for May. And based on the weekly observations (to May 20), home prices in all the five mainland state capitals were either flat or slightly lower during the month. So far in May, Melbourne and Sydney home prices are down by 0.4 per cent and 0.2 per cent, respectively. Sydney home prices are down by 3.9 per cent, the weakest annual outcome in over five years.

• Also on Friday the Housing Industry Association is scheduled to release its new home sales report for April. And both AiGroup and Commonwealth Bank release surveys of manufacturing purchasing managers.

Overseas: Heavyweight US economic growth, personal spending and employment data

• Following the Memorial Day public holiday on Monday, the US enters the Northern Hemisphere summer with a tier-1 data deluge. Economic growth, employment and the US Federal Reserve’s preferred measure of inflation,are all released. Chinese manufacturing and services purchasing manager gauges are also issued.

• The week kicks off on Tuesday in the US when the CaseShiller home price and Conference Board consumer confidence surveys are released. Home prices grew at a healthy annual rate of 6.8 per cent in February. And consumer confidence index is hovering near 17-year highs due to improving job security. The Dallas Fed manufacturing index and regular weekly data on US chain store sales round-out the data releases.

• On Wednesday the second (preliminary) estimate of US economic growth for the March quarter is issued. The initial estimate suggested that the economy grew at a 2.3 per cent annual rate. And only a modest upgrade in growth to 2.4 per cent is tipped as consumer spending softened over the winter months.

• Also on Wednesday the advance report on goods trade is issued for April. The US trade deficit in goods narrowed by 10.3 per cent to US$68.3 billion in March – the first narrowing of the deficit in seven months as imports weakened. The private sector ADP employment report, US Federal Reserve Beige Book of regional economic conditions and mortgage finance data are also released.

• China’s National Bureau of Statistics issues the purchasing managers’ surveys for May on Thursday. Manufacturing and services activity have been stable. According to the State Information Centre, China’seconomy is likely to grow at an annualised rate of 6.7 per cent over the June quarter.

• In the US on Thursday the personal income and spending report is released. The US Federal Reserve’spreferred measure of inflation – the personal consumption expenditure deflator – will be keenly observed. The deflator is expected to increase by 0.1 per cent to an annual growth rate of 2 per cent in April.

• Also on Thursday data on new claims for unemployment insurance, pending home sales and the regional manufacturing survey from the Chicago Federal Reserve are all issued.

• On Friday the Chinese private sector Caixin purchasing manager’s index for manufacturing is released.

• Also on Friday the US jobs and ISM manufacturing reports for May are issued. The unemployment rate is forecast to remain stable at a 17 1⁄2-year low of 3.9 per cent while an additional 185,000 jobs may have been created in the month.

• The prices gauge of ISM index hit 7-year highs in April, stoking inflationary concerns as manufacturers passed on input price increases. And construction spending is tipped to rebound by 1.1 per cent in April following a 1.7 per cent decline in March.

Weekly Global Currency Outlook

• We expect USD to trade firmly this week for three reasons. First, trade developments can worsen again. President Trump’s tariff exemptions on steel and aluminium imports from the European Union, Canada and Mexico expire on 1 June. Meanwhile, Trump is looking to apply tariffs on US imports of car and car parts.

• Second, financial market stress in emerging markets (EM) has increased lately, albeit from low levels. JP Morgan’s EMBI+ sovereign spread index, EM USD‑denominated government bond yield spreads over comparable US Treasuries is trading just under a multi‑month high. The USD generally performs well in periods of heightened financial market concerns.

• Third, US interest rate expectations can adjust a bit higher in favour of USD. We see upside risk to Friday’s US April average hourly earnings growth (consensus: 0.3% MoM, 2.7% YoY). Business and consumer surveys of future compensation improved in April. Also, the four regional manufacturing surveys released so far this month suggest the national ISM manufacturing index rebounded strongly in May to 59.0pts (Fri).

• AUD/USD and NZD/USD will likely trade on the defensive this week because of USD strength. But AUD can continue to outperform against NZD, CAD, GBP and EUR supported in part by encouraging Australian and Chinese economic activity. On Wednesday, China’s May manufacturing PMI is expected to tick‑up by 0.1pts to 51.5pts, consistent with further expansion in economic activity. On Thursday, strong business surveys in Australia point to upside risk to the second estimates of 2018/19 total capex spending plans (CBA forecast: $A90bn, up from a first estimate of $A84bn).

• In New Zealand, our ASB colleagues projects the Terms of Trade (ToT) to fall by 4% in Q1 (Fri) because of lower dairy, forestry and fruit prices. This bodes well for AUD/NZD in the near‑term. But over the remainder of 2018, the ToT is expected to resume trending higher, generating support for the NZD.

• CAD will remain under broad downside pressure this week largely because of ongoing trade friction with the US. On Thursday, we expect the BoC to keep its target for the overnight rate at 1.25% (75% priced‑in by Canadian interest rate futures) and stick with its gradual rate hike bias. Still, stronger Canadian Q1 GDP growth (Thu) can offer CAD some intra‑day support.

• Italian political uncertainty will continue to weigh on EUR this week. The anti‑establishment coalition (Five Star Movement and the League) dropped their bid to form a government. This raises the likelihood of new elections. But upside risk to Eurozone May CPI inflation (Thu) can offer EUR some support. Faster Eurozone CPI inflation will likely reinforce the case for the European Central Bank (ECB) to proceed with a modest change in its forward guidance stance at its 14 June meeting.

 

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This Freightplus article contains information obtained from sources believed to be reliable and has been prepared in good faith and with all reasonable care. Freightplus makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this website.

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