Weekly Market & Currency Developments – From Our Bankers

Week Beginning June 3 2018

Australia: “Winter Whirlwind”

• Each change in seasons is accompanied by a marked increase in the amount of new Australian economic data. So the “Winter Whirlwind” gets underway in the coming week. Well over a dozen indicators will be released in the first two weeks of June with economic growth and the Reserve Bank Board meeting in focus in the coming week.

• The week kicks-off on Monday when ANZ releases the May data on job advertisements and the Bureau of Statistics (ABS) releases the quarterly Business Indicators publication and retail trade data.

• Job ads fell by 0.2 per cent in April after falling 0.1 per cent in March. Hiring has slowed after the frenetic pace of 2017.

• The ABS business indicators publication includes data on sales, profits, wages and inventories so the data is important in rounding out our knowledge of the economy.

• Retail trade may have lifted a modest 0.2 per cent in April.

• On ‘Super Tuesday’ there are five economic indicators to be released alongside the meeting of the Reserve Bank Board.

• Car sales, consumer sentiment, the services gauge, government finance and the quarterly balance of payments are due for release.

• Arguably the most important of the indicators are the car sales figures, services gauge and the weekly reading on consumer sentiment because they are the timeliest. Consumer confidence has generally improved in recent weeks. The key question is whether the lift in confidence has translated to increased spending.

• The Reserve Bank Board also meets on Tuesday but no change in rates is expected. This will be the 22nd consecutive month without a change in rates. In fact, it is difficult to expect any change in the wording of the accompanying statement.

• On Wednesday, the ABS releases the March quarter estimate of economic growth – as judged by the change in gross domestic product (GDP). There are a number of components of the GDP equation still to be revealed, but on current information it seems like the economy grew by 0.5-0.7 per cent in the quarter. The Reserve Bank is expecting annualised economic growth to lift to around 3.25 per cent over the coming year, up from the current annual rate of 2.4 per cent.

• On Thursday the ABS releases the April data on exports and imports. The March trade surplus hit a 10-month high of $1,527 million. And there has only been one trade deficit recorded in the past 11 months. So it is clear that Australia is paying its way in the world, courtesy of both higher prices and volumes of mining and rural goods as well as higher tourism receipts. A surplus of around $1 billion is tipped in April.

• Also on Thursday AiGroup releases its construction industry gauge for May.

Overseas: Quiet week in the US

• A quieter week is in prospect for economic events in the US. But trade and inflation figures will be released in China, adding to the list of economic offerings.

• The week kicks off on Monday in US with data on factory orders as well as the US ISM New York regional gauge. Factory orders have lifted in seven of the past eight months, rising by 1.6 per cent in March. And the ISM index hit a 3-month high in April.

• On Tuesday, gauges that track activity in the services sector are to be released in both China and the US. Also in the US the JOLTS series of job openings will be issued together with the IBD/TIPP economic optimism index and the usual weekly data on chain store sales.

• On Wednesday the international trade data for April is released in the US together with the final March quarter estimates of productivity and labour costs. In March the trade deficit was US$49 billion, little-changed from February. And economists don’t see too much scope for change in the 2.7 per cent annual lift in labour costs or 0.7 per cent annualised lift in productivity.

• The usual weekly data on mortgage lending is also issued in the US on Wednesday.

• In the US on Thursday the April data on consumer credit is released with the regular weekly data on new claims for unemployment insurance (jobless claims). Jobless claims have lifted over the past four weeks from the lowest levels in 48 years. And consumer credit lifted US$11.6 billion in March – the smallest increase in six months.

• On Friday the May data on exports and imports is released in China. In April a trade surplus of US$28.8 billion was revealed with exports up 12.9 per cent on a year earlier and imports up 21.5 per cent. However much of the interest in the data will be on the latest estimates of China-US trade.

• On Saturday in China the May inflation data is due for release – data on both producer and consumer prices. In April, consumer prices fell 0.2 per cent, causing annual growth to slow from 1.9 per cent to 1.8 per cent. The annual rate of producer prices lifted from 3.0 per cent to 3.4 per cent in April.

• Also on Friday and Saturday, leaders of the G7 or Group of Seven nations meet in Canada.

Weekly Global Currency Outlook

• We expect USD to trade firmly again this week. Evidence of rising US inflation pressures suggests US interest rate expectations can adjust a bit higher in favour of the USD. US average hourly earnings grew more than the consensus in May and the prices paid subcomponent of the ISM manufacturing index edged up to a seven‑year high of 79.5pts in May.

• Moreover, worries about worsening trade development will continue to support the USD, especially versus the cyclically sensitive currencies (like AUD, NZD and CAD). There has been no material breakthrough after a third round of China‑US trade negotiations over the weekend. And last Friday, the US imposed tariffs on steel and aluminium from the European Union, Canada and Mexico. The European Union, Canada and Mexico immediately announced they would match dollar for dollar the US tariffs and appeal to the World Trade Organisation.

• AUD/USD will remain range bound this week but AUD can outperform on the crosses. The soft patch in global economic activity, as reflected by the decline in the global manufacturing PMI, limits AUD/USD upside. Still, favourable Australian economic conditions will underpin AUD/USD. Our economists currently project Australia’s real GDP will expand in Q1 at a quarterly pace of 0.6‑0.8% or 2.50%‑2.75% annually (Wed). This would be close to Australia’s potential GDP growth of 2.8%/yr. Full preview and point estimate will be published on Tuesday after the final quarterly partial data is released.

• On Tuesday, the RBA is widely expected to keep the cash rate at 1.50% and continue to sound upbeat on the outlook for the Australian economy.

• EUR/USD has scope to recover this week. The formation of a new Italian government (led by the Five Star Movement and the League) has eased Italian political uncertainty. And, faster Eurozone CPI inflation in May reinforces the case for the European Central Bank (ECB) to proceed with a modest change in its forward guidance stance at its 14 June meeting.

• However, EUR/USD will struggle in the near term to sustain a move above 1.1857 (30‑day moving average). Concerns about the potential fiscal profligacy path planned by Italy’s populist government will keep Italian‑German bond yield spreads relatively wide and curtail EUR upside.

• A formal fiscal program has not yet been announced by Italy’s new government. But the coalition agreement, hashed out mid‑May, between the Five Star Movement and the League proposed citizen’s income for the poor, flat tax rates at 15% and 20% and a roll‑back of pension reforms. If those plans are implemented, the Italian budget deficit (currently 2.3% of GDP) can widen significantly beyond the 3% deficit limit mandated by the Eurozone’s stability and growth pact.

 

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