The Reserve Bank of Australia left the cash rate unchanged last week once again, at a record low of 1.50%, in what was billed as a 50/50 call on whether they would cut or not. In the statement by RBA governor Lowe he never explicitly said they were shifting to an easing bias, but the economic signs are still there for a cut later in the year based on current fundamentals. Again pinning economic hopes of improving employment to boost the economy, Lowe will be watching the labor market over the coming months to gauge further targets. Markets are still pricing in a drop in the next 18 months – possibly two. They may not wait to long if CPI inflation continues to fall like it has in the last quarter of 2018 from 1.8% to 1.3% in the first quarter of 2019. This week’s unemployment rate and job’s numbers q/q will be key, followed by Federal elections in the weekend. Scott Morrison’s Liberal party is slightly behind labor in the polls with Bill Shorten the preferred Prime Minister.
The Reserve Bank of New Zealand surprised markets by cutting the cash rate 25 points from 1.75% to 1.50% on Wednesday in a unanimous 0-6 vote by the new monetary policy committee. Global growth has slowed since the last quarter of 2018 so a cut was necessary to support the outlook for employment and inflation. The RBNZ sees annual CPI at 1.7% by June 2020, improving off the 1.5% currently. The New Zealand Dollar initially moved significantly lower across the board but had soon strangely retraced more than 50% of the downward moves into Friday. Further risk off sentiment also hindered any topside momentum in the kiwi with US/China trade negotiations ending without any agreement. Trump clearly speaking out over Twitter at his displeasure with how the Chinese officials have handled negotiations to date with “they love ripping off America” threatening to increase the 200B tariff total to a much higher 500B if no cooperation was forthcoming. “We are right where we want to be with China”. Zero data on the calendar this week for the kiwi dollar so movement will be dictated by offshore events.
The US Dollar Index measuring greenback strength tracked lower to 97.3 over the week amid a risk off tone aligned with the ongoing trade disputes between China and the US. President Trump formally hiked the tariff amount on 200B worth of Chinese products Friday from 10% to 25%. Trump has been tormenting China on Twitter over the weekend with a spree of comments like “ripping off America” as it seems he would dearly love to increase the tariff total an additional 300-325B which we understand to be the total of Chinese products entering the USA. He went on to say the current situation would get way worse if China didn’t come to the party over current negotiated terms. Chinese Premier Liu has said China will agree a deal but only if it also favourable to the Chinese people. US CPI m/m printed down on expectation of 0.3% lower than the 0.4% expected but was up 2.0% y/y from 1.9% last month confirming a five month high from November 2018 led with a rebound in energy prices which surged by 1.7% for the month. This week’s economic docket is quiet with only tier one Retail Sales to print Friday.
The Euro bounced higher off a low of 1.1134 and closed the week against the greenback around 1.1235. Broadly outperforming all major currencies except the GBP, the Euro has performed well during a period of absent significant data releases. Mario Draghi will step down in October after 8 years at the helm as president of the European Central Bank (ECB). In an interview with the central bank’s top contender Francios Villeroy de Gaihau he has praised the work carried out by Draghi during his time. He said because Draghi has broadened the ECB’s monetary instruments the euro is in a better place today. He said if he was to get the top job he would not make fundamental changes to current policy. This week we have German economic sentiment followed by German GDP q/q which is expected to print at 0.4% up on April’s 0.0%.
The British Pound has been the weakest performer of the eight biggest currencies since the 5th of May going down 1.3% against the US Dollar, 2.4% against the Japanese Yen and 0.60% versus the Kiwi as markets mostly ignore positive data. Manufacturing production m/m impressed by printing 0.9% after 0.1% was expected with production for the last quarter rising to 1.4% compared to the Dec 18 quarter. GDP increased by 0.5% in the first quarter of 2019 compared to the 0.2% in the previous quarter showing a nice upward bias to economic growth. This week we only have job’s numbers on the calendar to focus on with the unemployment rate expected to be unchanged at 3.9%.
Poor risk sentiment over the week based on the ongoing uncertainty over trade talks between US and Chinese officials has benefited the Japanese Yen. Investors have chosen the safe haven of the Yen to park capital. As a result, the Yen has been the strongest performer over the eight biggest traded currencies appreciating a whopping 2.4% over the Pound. On the data front – Household spending improved by 2.1% from the 1.6% expected, but it was the wage earnings data which disappointed y/y at -1.9% from -0.5% markets had predicated. This is the largest drop in real cash earnings of employees in four years since June 2015. Interestingly the large drop from a year ago might have been attributed by the labor ministry using faulty polling methods causing variances on wage data. This week we have Current Account for March which is expected to be around the 1.71T area, slightly down on February’s 1.96T. Risk markets will continue to play a factor this week if US and China trade negotiations are back occupying headlines.
Canadian employment surprised markets Saturday morning when the unemployment rate dropped from 5.8% to 5.7%, with jobs numbers increased 106k with a boost to part time workers in April. This bought the CAD off its weekly low of 1.3380 to retrace Thursday’s decline back to 1.3440 where it closed for the week. Earlier Canadian Trade Balance sent the CAD packing after the Deficit climbed to -3.2B from the -2.4B expected. Monthly CPI is this week’s focus with April figures forecast to come in at 0.7%. Y/y CPI stands at 1.9% with expectation of this to increase past 2%
Major Announcements last week:
• RBA leave rate unchanged at 1.5%
• RBNZ cut rates to 1.5% from 1.75%
• US/China trade tariff negotiations take a turn for the worse with Trump threatening more tariffs over Chinese products
• US q/q CPI prints down at 0.3% but y/y improves to 2% from 1.9%
• Canadian Unemployment drops from 5.8% to 5.7% but the workforce improved a hefty 107,000