Overnight Market Headlines
- The US 10yr treasury yield fell in response to the GDP data, focussing on the fall in the inflation indicators within the report, from 2.54% to 2.49%. The 2yr yield fell from 2.32% to 2.27% - a one-month low.
- The chances of a Fed rate cut by December, implied by Fed fund futures, rose from 80% to 95%.
- Gold jumped to a near two-week high, as the USD slipped on tepid U.S. inflation data, outweighing an overall strong first-quarter growth report. Spot gold gained 0.7% to $1,286.41 per ounce
- Copper and most other industrial metals inched higher, boosted by a retreat in the USD and hopes that a meeting between the U.S. and China could help ease damaging trade tensions. Three-month LME copper ended 0.6% higher at $6,400 a tonne.
- Oil prices fell 3% after U.S. President Trump again pressured OPEC to raise crude production to ease gasoline prices. Brent crude futures settled at $72.15 a barrel, down $2.20 (3%). WTI crude ended at $63.30 a barrel, down $1.91 (2.9%).
- The US dollar index closed down 0.2% on the day @ 98.05
- EUR rose from 1.1120 to 1.1170 following the US GDP data
- USD/JPY fell from 111.80 to 111.43
- AUD rose from 0.7030 to 0.7061, but retraced later in the NY session towards 0.7030
- NZD similarly rose from 0.6640 to 0.6682 before retracing
- AUD/NZD slipped from 1.0580 to 1.0560 – a two-week low.
- AUDEUR remained above 0.6300 in a tight 20 point range
AUD remained unscathed after US GDP, with the range remaining intact. Rebounding from the 0.6985 low, AUD appeared set to remain in its familiar 0.7000/0.7200 range after the U.S. Q1 GDP release rattled the USD and U.S. interest rate complex.
The upside headline GDP surprise initially spiked AUD down but the big downside core PCE miss reversed the fall. The rally drove AUD above 0.7060 however fell back towards 0.7030 levels. A deeper look at the GDP report revealed a picture that was less robust than initial appearances. That, combined with the unexpectedly soft core PCE, produced weakness in Treasury yields and the USD.
AUD tumbled to six-week lows last Wednesday and short-term bond futures shot to record highs after surprisingly weak inflation figures boosted betting on a rate cut as early as May.
The sharpest move came in response to Australia’s Q1 inflation data last Wednesday. Looking at the CPI details, the 0.0% reading on overall inflation was in large part due to petrol prices. But underlying inflation was also weak. The trimmed mean CPI (the RBA's preferred measure) rose just 0.3% in the quarter, 1.6%yr, leaving an uphill battle to the 2% pace by end-2019 forecast by the RBA in February.
The below-consensus inflation reading stoked a fresh wave of pricing for RBA rate cuts. A cash rate cut to 1.25% had only been fully priced by the October 2019 meeting but after the CPI data it was priced as early as June, with the chance of a May cut – in the heat of the election campaign no less – around 2/3. Since then, pricing has eased off a little bit, but it is still a very big change overall, with 2 rate cuts priced by December and pricing for early 2020 below 1%. The debate over the RBA policy outlook will dominate discussion in the week ahead, with little on Australia’s data calendar to provide fresh direction. This is likely to keep AUD on the back foot. Recall that at the 2 April meeting, the RBA said that the “Australian labour market remains strong” and since then, we have seen an above-consensus 26k rise in jobs, with full-time work up 48k. So their optimism over the job market probably hasn’t changed. The question is the weight placed on the CPI.
An upward sloping trend-line since January 04, at 0.7000, acts important downside support that holds the gate for the quote’s plunge to 0.6980 and 0.6910 numbers.
On the upside, multiple lows surrounding 0.7050/55 area makes it a tough challenge for buyers to conquer ahead of aiming 50-day simple moving average (SMA) near 0.7105.
Risk Event Calendar Today
- No Australian Economic data today
- Japan: public holidays for golden week and the new imperial era mean markets are closed for the entire week.
- Euro area: Mar credit data is released and will be influential to TLTRO decision making. Apr European commission business climate indicator is anticipated to edge down to 0.51 from 0.53.
- US: Mar personal income is expected to rise 0.4% and personal spending 0.7%. The PCE deflator is seen to show annual core inflation holding at 1.7%.