10th April 2019 - Markets cautious overnight ahead of key risk events in the next 24 hours

Markets have traded in a cautious mood overnight ahead of key risk events over the next 24 hours, including RBA Debelle speech this morning ahead of ECB meeting, EU Brexit summit and US CPI tonight followed by the FOMC Minutes early tomorrow morning.

Yesterday's Recap

Australian housing finance numbers landed above expectations with a 2.7% gain for February, with owner occupier approvals in line with expectations but investor loans a coming in higher. This boosted the Aussie Dollar above 0.7150 albeit briefly as negative IMF world growth comments and an announcement that Wynn was terminating talks eroded any gains.

Currency Markets

· The US dollar index is unchanged on the day. EUR round-tripped from 1.1265 to 1.1285 and back. USD/JPY fell from 111.40 to 110.98, the defensive yen the best performer on the day. AUD initially rose from 0.7120 to 0.7152 but then fully retraced. NZD similarly round-tripped from 0.6740 to 0.6759 and back. AUD/NZD round-tripped from 1.0570 to 1.0595 and back.

· US job openings fell a hefty 538k in February to 7.087mn, their biggest decline since 2015, with weakness broad-based including across construction, retailing, transportation, finance and leisure and hospitality. The quits rate held steady at 2.3% implying employees remain upbeat about jobs prospects. The number of job openings still exceeds the number of unemployed too, but the steep fall nevertheless signals some cooling in the labour market.

· As the US moved toward imposing tariffs on European imports, US Pres. Trump tweeted that the EU “has taken advantage of the US on trade for many years. It will soon stop!” Meanwhile, the EU said it’s preparing retaliatory tariffs against the US over subsidies to Boeing.

· The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, which would be the lowest growth rate since 2009. Growth in 2020 is seen higher at 3.6%. Downside risks cited included US-China trade negotiations and Brexit.

Interest Rates

· The US 10yr treasury yield fell from 2.52% to 2.48%, the 2yr yield from 2.36% to 2.33%. The chances of a Fed rate cut by December, implied by Fed fund futures, rose from 60% to 70%.

· AU bonds took direction from USTs overnight, rallying around 2bps across the curve. AU 10yr bonds underperformed USTs, widening the AU-US 10yr spread to -62.1bp. Expectations for a rate cut in August held steady at 92% and a full cut is priced for September.

Commodity Markets

· Crude markets slipped from 5 month highs as comments from Putin that he was “comfortable” with current levels of crude prices and that “output shouldn’t stop, investment should come into the sector, otherwise that also may create problems both for us and global energy” hit sentiment. Russia has appeared to be less willing to embrace an extension on cuts and Putin’s comments added to that view. However, it’s fair to note that losses were modest even with API data suggesting that inventory was up 4.09mb last week; WTI is down just 0.28% and Brent down 0.48%.

Key Risk Events

· Locally the Westpac-MI Consumer Sentiment survey is released and will provide insight on how the Federal Budget went over with consumers.

· RBA Deputy Governor Debelle speaks on “The State of the Economy” in Adelaide, 1:40 pm (Sydney time). Given the very obvious changes in the last paragraph of April policy statement (at least to market participants!) to suggest that the RBA will “monitor developments and set monetary policy to support sustainable growth” his comments will be well received.

· The special EU Summit on Brexit takes place today in Brussels. Comments from Tusk overnight suggest that a June 30 extension is not on the table. Rather, Europe will only offer an extension of a year, with some flexibility.

· The Apr ECB policy meeting follows the dovish shift at the March meeting. While the stance is unlikely to change materially at this meeting, further discussion on the details of TLTRO-III and side effects of the negative deposit rate will be in focus.

· In the UK Feb GDP is expected to be subdued with the rolling three-month pace holding at 0.2%.

· Over in the US Mar CPI is seen to rise 0.4%, with annual inflation up to 1.8% from 1.5% and core inflation steady at 2.1%. Mar FOMC minutes are released and will provide greater detail on committee members’ views. Fedspeak involves Vice Chair Clarida on “The Federal Reserve's Review of Its Monetary Policy Strategy, Tools, and Communication Practices”.

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