Market Overview:
Wall street closed last week down around 1% with tech stocks underperforming. Performance so far this week has been somewhat underwhelming as well with indices failing to stage any sort of recovery. Equities are not being helped by interest rates increases, with the US 10-year knocking of the door of 3%. It’s a massive level technically, and psychologically, and a break above 3% may well see quick move to 3.25% develop. It would also provide confirmation in many trader’s eyes, that bonds are now in a long-term bear market. That’s something the stock market should be very concerned about. News over the weekend that North Korea has suspended its Nuclear programme has been welcomed, albeit with a healthy dose of scepticism. It remains to be seen if Kim Jong Un is simply looking to gain concessions, only to restart the programme over the coming years, or if he genuinely wants a better relationship with the rest of the world. But from a geo-political point of view, it’s step in the right direction.
Australia
The Australian dollar (AUD) struggled last week against most other currencies, although it did outperform the New Zealand dollar (NZD). The key release last week was Australian Employment Change that printed below forecast at +4.9k. This week the focus is firmly on inflation data due out in a few hours’ time. The market is looking for a quarterly increase of 0.5%, down a touch from the prior quarters 0.6% result. That would put the year on year rate of inflation at 1.85%. That is below the RBA’s 2-3% target, which has been the case for more than 2 years now. The RBA expect underlying inflation to slowly climb back to 2% over the next couple of years. With that sort of outlook, it would be foolish to expect the central bank to adjust the cash rate any time soon.
New Zealand
While last week’s inflation data was a touch higher than the market expected, it was below the RBNZ’s forecast and it provided only very temporary support the NZD. The local currency ended the week lower, underperforming in the face of broad based USD strength. This week will likely be a quiet one with a bank holiday on Wednesday and only migration data and trade balance data set for release.
United States
The United States dollar finished the week on the front foot making broad based gains against all other G10 currencies. The USD was no doubt helped by rising US Treasury yields with the US 10-year pushing up to 2.99%. The 3.00% level is a key psychologically barrier, and a move above there would further pressure stock markets. The Fed’s Kashkari was in the press over the weekend stating that although inflation and wages are slowly climbing, they’re not accelerating. He also raised concerns about the general flattening of the US yield curve, echoing what other Fed officials have said recently. He suggested that the flattening of the yield curve suggests the Fed is close to the neutral rate (the interest rate which neither stimulants or restrains the economy). The USD has struggled over the past couple of months, despite generally supportive economic data, Fed interest rate hikes, and a sharply higher LIBOR rate. It remains to be seen if this week’s recovery in the USD is the start of a much bigger correction, something we think is overdue. This week to draw focus we have CB consumer confidence, Core Durable Goods orders and Advance GDP.
Europe
Recent data out of Europe has been a little disappointing, but Friday’s release of Consumer Confidence countered that trend. Eurozone Consumer Confidence for April rose 0.4% against expectations of a 0.1% fall. European Central Bank (ECB) president Draghi was on the wires quoted as saying “Notwithstanding the latest economic indicators, which suggests that the growth cycle has peaked, the growth momentum is expected to continue”. He added that patience, persistence and prudence are needed and that confidence in the inflation outlook as increased. We will hear more from Draghi on Thursday when the ECB have their latest interest rate meeting. Ahead of that release we have a raft of PMI’s from the manufacturing and service sectors along with the German IFO Business Climate index.
United Kingdom
The Great British Pound (GBP) suffered last week in the wake of poor data releases. Inflation and retail sales were the key data points that did the damage with many in the market starting to second guess whether or not the Bank of England will now hike interest rates in May, something that seems an almost certainty only a few weeks ago. A recent BBC interview with Governor Carney has sown even more doubt. He noted the recent softer than forecast results and said there was still a lot of data to consider before the Monetary Policy Committee (MPC) can decide when to hike interest rate. So that’s far from a done deal then, and the GBP price is reflecting that. That BOE meeting is just over two weeks away on the 10th May. This week we have CBI Realized Sales numbers, Consumer Confidence and the Preliminary reading of GDP.
Japan
Data yesterday showed that Japanese manufacturing activity picked up in April from the previous month. Manufacturing PMI rose to 53.3 from 53.1 prior, potentially signalling the economy is recovering from a rough patch in the first quarter. The Bank of Japan (BOJ) is far from even considering adjusting monetary policy however, with comments from Governor Kuroda recently saying “In order to reach the 2% inflation target, I think the Bank of Japan must continue very strong accommodative monetary for some time. It’s necessary.” We will get to hear more from Kuroda on Friday when the BOJ releases is latest Monetary Policy Statement. Ahead of that we also have Retail Sales, Industrial Production, Tokyo Core CPI and the unemployment rate.
Canada
The Canadian dollar struggled into the close of last week pressured by a couple of soft economic releases. Retails Sales ex-auto came in flat, against and expectation of +0.4%, and inflation data also disappointed printing at 0.3% against forecasts of 0.4%. Despite missing expectations for the past month, consumer prices in Canada up 2.3% year on year in March, the largest increase since October 2014, and the Bank of Canada’s Governor Poloz was quick to say he’s not at all concerned about above target inflation. He said the BOC has a 1 to 3% range for inflation and it does not mechanically raise interest rates when inflation goes about 2%. His comments did little to stop the rot in the Canadian dollar which has remained under pressure in the early stages of this week.
Major Announcements last week:
• Bank of Canada leave interest rate unchanged at 1.25%
• NZ CPI 0.5% vs 0.4% expected
• Australian Employment Change +4.9k vs +20.3k expected
• Australian Unemployment Rate 5.5% as expected
• UK Retail Sales -1.2% vs -0.5% expected
• Canadian CPI 0.3% vs 0.4% expected
• Canadian Retail Sales 0.0% vs 0.4% expected