Weekly Market & Currency Developments – From Our Bankers

Week Beginning June 10 2018

Australia: Jobs, business and consumer surveys dominate

• Following the Queen’s Birthday public holiday on Monday, ‘tier 1’ economic data releases feature prominently in the coming week. The all-important May employment report is issued on Thursday. Monthly business and consumer surveys together with housing and lending finance data cap-off a busy, but holiday-shortened week.

• The week kicks-off on Tuesday with the release of the National Australia Bank business survey. The NAB business conditions index rose to a record high of +21.1 points in April, up from an upwardly-revised +15.4 points in March (previously +14.1 points). The business confidence index rose to +10.1 points in April from an upwardly-revised +8.0 points in March (previously +7.4 points).

• There are good reasons to expect that business conditions and confidence remained robust in May. Investors will also look for any signs of nascent wage or price pressures given the fairly benign inflation outlook.

• Also on Tuesday data on home loans (housing finance) and broader lending finance are issued with credit and debit card lending. Demand for loans, especially from investors, has weakened in line with softening home prices and tighter bank lending standards. Data from the Bankers Association implies that the value of home loans may have fallen by 5 per cent in April.

• On Wednesday the Reserve Bank Governor delivers a speech “Productivity, Wages and Prosperity”. Investors will be looking for any new views on the economy that could influence the timing of the next interest rate change.

• The weekly consumer sentiment index is scheduled to be released by Roy Morgan and ANZ on Wednesday.

• Also on Wednesday, the monthly Westpac and MelbourneInstitute consumer confidence reading is released. The gauge fell by 0.6 per cent to 101.8 points in May. Still, the index remained above its long-term average of 101.5 points. A reading above 100 points denotes optimism. Most interest is on the quarterly survey of ‘wisest place for savings’.

• On Thursday the ABS issues the May employment report. The record-breaking job-creation machine has slowed in recent months. However, a still-healthy 32,700 full-time jobs were added in April. A key leading indicator – the ANZ job advertisements series – was at the highest level in seven years in May. And the number of hours worked rose by 1.1 per cent in April and were up by 5.4 per cent over the year – the strongest annual gain in 18 years – highlighting the underlying strength of the job market.

• The unemployment rate remains ‘sticky’ at 5.6 per cent due to an increase in the participation rate – now at 65.6 per cent. More females and older Aussies are working or looking for work than ever before. Economists tip an increase in total jobs of around 20,000 during the month.

• On Friday, Reserve Bank Assistant Governor Luci Ellis delivers a speech.

Overseas: The US Federal Reserve takes centre stage

• All eyes will be on the US Federal Reserve monetary policy meeting commencing on Tuesday. US inflation data will also be keenly observed. Monthly sales, production and investment data feature in China.

• The week kicks off on Monday in China with money supply and lending data expected.

• On Tuesday, the US Federal Reserve begins its two day monetary policy meeting. With core inflation breaching the US Federal Reserve’s 2 per cent target and the unemployment rate at an 18-year low of 3.8 per cent, the Federal Reserve Funds Rate is expected to be increased by 0.25 per cent to 1.75-2.00 per cent target range.

• Also on Tuesday US consumer prices, the monthly budget statement, weekly data on chain store sales and a measure of small business sentiment – the NFIB business optimism index – are all released. Core inflation is tipped to increase by 0.2 per cent to 2.2 per cent. Headline consumer prices are forecast to lift by 0.2 per cent to 2.6 per cent due to rising gasoline, shelter and food prices.

• On Wednesday in the US, data on producer prices and the weekly mortgage lending figures are expected. The core measure of producer prices (excludes food and energy) stands at a 2.6 per cent annual rate. A 0.2 per cent increase in prices is tipped in May.

• On Thursday Chinese investment, production and retail sales are issued for May. The official manufacturing purchasing managers’ index rose to its highest level in nine months in May due to unseasonably warm weather and rising upstream commodity prices. Investment and production are tipped to maintain stable annual growth rates of 7 per cent. Retail sales may be up 9.5 per cent over the year.

• Also on Thursday US retail sales, trade (export/import) prices and inventories data are released. A 0.4 per cent lift is tipped in May after a winter ‘soft patch’ in the March quarter.

• On Friday China house prices are issued for May. Prices in Tier 1 cities are decelerating as the government clamps down on property speculation.

• Also on Friday US industrial production, consumer confidence and the New York Fed purchasing managers’ index are issued.


Weekly Global Currency Outlook

• Currencies will be driven this week largely by the outcomes of the Federal Open Market Committee (FOMC) and European Central Bank (ECB) meetings on Thursday. Overall, by the close of trade on Friday afternoon, we anticipate a lower USD, a higher EUR/USD, a higher AUD/USD but a lower AUD/EUR. In terms of other central bank meetings this week, Friday’s Bank of Japan (BoJ) meeting is unlikely to generate much financial market volatility (see page 3 for more details).

• The FOMC is widely expected to increase the target range for the federal funds rate by 25bps to 1.75‑2.00% (93% priced‑in), and raise the cap on its monthly balance sheet reduction by US$10 billion to US$40 billion per month as of July. The minutes from the FOMC’s May meeting notes the interest rate on excess reserves will increase by only 20bps to 1.95% to technically guide the effective funds rate near the middle of the 1.75‑2.00% range.

• The minutes also suggest “some participants” want to revise forward‑guidance language in the post‑meeting statement indicating that the “federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” or to modify the language stating that “the stance of monetary policy remains accommodative”.

• The FOMC will likely bring forward the timing as to when they project the US core PCE deflator to reach its 2% target to 2018 from 2019. This should not be a major surprise to market participants considering the US core PCE deflator has already lifted to 1.8% YoY in April and price pressures are rising. Beyond 2018, the FOMC’s US core PCE deflator projections are expected to remain contained near or slightly above 2%, consistent with US 10‑year breakeven inflation rates (a market‑based measure of expected inflation) and the FOMC’s symmetric inflation goal.

• Judging from solid US economic activity and favourable employment conditions, there is a risk the FOMC’s median fed funds rate projection for 2018 is raised to 2.375% from 2.125%. But this would roughly be in‑line with US interest rate futures. US overnight indexed swaps (OIS) currently imply about 75bps of fed funds rate hikes over the next twelve months to about 2.37%.

• In our view, the USD will trade on the defensive later this week because the FOMC will not make material upward revisions to their US inflation and median fed funds rate projections. Also, this week’s fed funds rate rise is virtually fully priced (93%).

• EUR/USD can edge higher this week. The ECB is widely expected to keep interest rates on hold. However, we anticipate the ECB will signal a gradual shift towards a less accommodative monetary policy stance which is EUR supportive. Specifically, the ECB will likely confirm the termination of its €30bn/month asset purchases for end‑September and provide a guide on how long they will reinvest coupons as well as maturing assets.

• Moreover, inflation dynamics suggests the ECB will raise their headline CPI inflation projections (currently 1.4% for 2018 and 2019, and 1.7% for 2020). There is also a possibility ECB President Mario Draghi shrug‑off the impact on the Eurozone’s economic backdrop from recent Italian political developments.

• AUD/USD faces upside risks this week because of our expectations for firm Chinese May economic activity data and solid Australian job gains on Thursday (see page 3 for details). CBA economists project Australia’s economy added 20k jobs in May and the unemployment rate to stay at 5.6%. Thursday’s Australian employment report also includes the Q2 reading on underemployment. A drop in the underemployment rate would be a welcome outcome with high underemployment a key factor behind weak wages growth.

• AUD/EUR has scope to drift lower this week as EUR strengthens following Thursday’s ECB meeting. The likelihood the ECB shifts to a less accommodative monetary policy stance will lead to narrower Australia‑German government bond yields. And relative Australia and Eurozone unemployment trend will continue to weigh on AUD/EUR over the longer term.



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