Weekly Market & Currency Developments – From Our Bankers

Investor Signposts: Week Beginning June 24 2018

Australia: End of Financial Year lull

• The End of Financial Year (EOFY) may be approaching, but tier-1 economic data in Australia is scarce this week. The latest update on Aussie household finances will be keenly observed given the laser-like focus of the Reserve Bank and economists on the biggest driver of economic growth – household consumption.

• The week kicks-off on Tuesday with the latest weekly reading on consumer confidence by Roy Morgan and ANZ. The number of optimists currently outweigh the number of pessimists. Improving job security, potential personal income tax cuts and EOFY sales have boosted consumer sentiment. That said, rising petrol prices, the weaker Aussie dollar, anaemic wage growth and falling home prices have weighed on household views.

• On Wednesday, the ABS releases the March quarter publication Engineering Construction Activity. While the ‘top level’ results have already been published, the publication goes into more detail about where the work is being done and how much activity is still to be completed.

• On Thursday the ABS releases the Finance & Wealth publication. The publication contains a raft of indicators such as household debt and wealth and sectoral holdings of financial assets such as foreign ownership of shares and bonds.

• Total household wealth (net worth) stood at a record $10,192.3 billion at the end of December, up $191.7 billion or 1.9 per cent over the quarter. In per capita terms, we estimated that wealth rose to a record $411,229 in the December quarter. And foreigners held a record $581.4 billion of Aussie shares in the December quarter or 30.4 per cent of the total.

• On Thursday the Bureau of Statistics releases the latest data on job vacancies – a key leading indicator of the job market. Job vacancies rose by 4.3 per cent to a record 220,900 in the three months to February. Job vacancies are up 19.3 per cent on a year ago – the strongest annual growth rate in over seven years. Compositionally, jobs growth has been led by the health services, education and construction-related industries. Near-record female participation in the workforce is lifting part-time jobs growth.

• The Reserve Bank also issues the May Financial Aggregates publication on Friday. Most interest is in the estimate of private sector credit (effectively loans outstanding) but measures of money supply are also released. Private sector credit (effectively outstanding loans) rose by 0.4 per cent in April after a 0.5 per cent rise in March. Credit was up 5.1 per cent over the year. Bank deposits rose just 2.5 per cent over the year to April.

• Also on Friday new home sales data for May is scheduled to be released by the Housing Industry Association.

Overseas: US economic growth and China manufacturing activity data dominate

• Over the coming week US economic growth, the US Federal Reserve’s preferred inflation measure, the core personal consumption expenditure deflator, and Chinese profits and manufacturing data are all released.

• The week begins in the US with the release of two influential regional activity gauges from the Federal Reserve Banks of Chicago and Dallas on Monday and Tuesday.

• Also on Tuesday, housing data comes into focus. New home sales are forecast to lift by 0.6 per cent in May to around 666,000 units. And a 0.2 per cent gain in home prices is projected in April, bringing the annual growth rate for the S&P/Case-Shiller 20-city guage to 6.5 per cent. US home prices grew at the fastest quarterly rate since 2006 in March. The regular weekly data on chain store sales rounds-out the data.

• On Wednesday, Chinese industrial profits data are issued for May. Profit growth rebounded strongly by 21.9 per cent over the year to April on the back of a favourable base effect and strong sequential growth. Unwinding of the Chinese New Year holiday effect contributed to the acceleration of revenue growth and industrial profit growth.

• Also on Wednesday there’s a data deluge in the US. The Richmond Fed Manufacturing Index, Conference Board consumer confidence, trade, durable goods orders and the regular weekly data on mortgage finance are all issued. US consumers’ assessment of current economic conditions is at a 17-year high. An overall US trade deficit of US$67.3 billion is expected in May, up from US$68.2 billion in April. And a key measure of business investment, durable goods orders, is tipped to lift by 0.2 per cent in May after a 1.6 per cent fall in April.

• On Thursday the final estimate of US economic growth (GDP) for the March quarter is released. No change in the annualised growth rate at 2.2 per cent is expected. Annual retail sales growth has picked-up to 5.9 per cent over the year to May, implying that the ‘soft patch’ in household consumption in early 2018 is behind us.

• Also on Thursday in the US is the regular weekly data on new claims for unemployment insurance.

• On Friday influential regional gauges from the Federal Reserve Banks of Chicago and Kansas are released. The personal income and spending report is also issued. The Fed’s preferred measure of inflation – the personal consumption expenditure deflator – will be keenly observed. The deflator is expected to increase by 0.2 per cent to an annual growth rate of 2.1 per cent in May.

• On Saturday China’s manufacturing and services purchasing managers’ indexes are released. Manufacturing activity rose in Mayto the highest level since September 2017. Solid growth momentum, unseasonally hot weather, and rising upstream commodity prices may have contributed to the increase.

Weekly Global Currency Outlook

• USD outperformance remains this week’s main currency theme. USD can edge higher this week supported by monetary policy divergence between the US Federal Reserve and other major central banks, and more protectionist global trade policies. Friday, the policy‑relevant US core PCE deflator is expected to quicken to an annual pace of 1.9% in May from 1.8% in April. This will reinforce the case for two more 25bps fed funds rate hikes this year (September & December) to a target range of 2.25‑2.50%.

• Last week the European Union (EU) implemented tariffs on some US products (like motorcycles and whiskey) in retaliation to US tariffs on steel and aluminium imports from the EU. Over the weekend, US President Trump warned the US would up the ante by threatening to impose tariffs of 20% on imports of cars from the EU “if these tariffs and barriers are not soon broken down and removed”. More inward looking trade policies does not bode well for financial/economic sentiment and tends to favour a firmer USD.

• USD/CNH can edge higher on looser monetary policy in China. As was expected China’s central bank (PBoC) announced on Sunday it would cut the reserve requirement ratio (RRR) for most banks by 50bps as of 5 July. The aim of the RRR cut is to unleash about CNY700 billion (equivalent to 6.2% of China’s GDP) of liquidity to support Chinese bank’s debt‑to‑equity swap and lending to small enterprises.

• AUD/USD and NZD/USD are vulnerable to more downside this week as global trade tensions impact sentiment and generate a bid for the USD. However, we emphasise that the real economic effects of all the proposed tariffs are minimal. In Australia, the main focus will be Friday’s May private sector credit report. The lift in volatility in the AUD short‑dated forwards (including the short‑dated AUD basis swap) is set to continue as the end of the financial year‑end approaches (30 June). Australian Bank Bill Swap‑OIS spreads have lifted to their highest levels since August 2011.

• In New Zealand, the RBNZ is widely expected to leave the Official Cash Rate (OCR) at 1.75% Thursday. Our ASB colleagues also believe the RBNZ will deliver a neutral statement with few substantive changes from the May Statement. Our ASB colleagues expect the RBNZ to lift the OCR in August 2019 but the risks are slightly more skewed to the OCR remaining on hold for longer.

• EUR/USD will trade on the defensive this week. On Friday, the Eurozone headline CPI inflation likely accelerated at an annual pace of 2% in June from 1.9% in May. This would be above the ECB’s projection for headline CPI inflation of 1.7% over the next two years. Still, the ECB indicated they expect key interest rates to remain at current levels “at least through the [northern hemisphere] summer of 2019”.



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