Herding Cats
Overview: After surging yesterday, equities are struggling to maintain the momentum that carried that S&P 500 to its best level since last October. Most Asia Pacific equity markets advanced. Japan's small losses were a notable exception. The Dow Jones Stoxx 600 has advanced in four of the last five sessions and is little changed, while US shares are trading with a heavier bias. Yields edged up in Asia, but core yields in Europe are a little lower and the US 10-year yield, which jumped 10 basis points yesterday to 2.50% and re-inverted the 3m-10 year curve that had many observers warning of a recession is consolidating now, leaving it a couple basis points lower. In the foreign exchange market, the dollar is firmer against the majors. With uncertainty over Brexit as thick as ever, sterling has joined the Antipodean currencies as the worst performers, while the yen and Swiss franc are threatening to move higher. Note that yen and Swiss franc enjoy among the highest correlations on a directional basis for the past 18 months.
Asia Pacific
The Australian dollar is a bit of a conundrum today. The economic news seems supportive, but the Aussie has slipped to the lower end of its recent range (~$0.7060). The central bank's decision to leaves on hold was no surprise, but the tone of the comments was more upbeat and did not sound like a central bank that was about to join the Reserve Bank in New Zealand and signal an easing bias. Although it recognized that consumption has been impacted by weakness in disposable income due to house prices, it noted that the strong labor market is underpinning wage growth. This underscores the importance of the labor market in the reaction function of the RBA, and therefore, the market will be particularly sensitive to employment and consumption data.
Separately, Australia reported a monster jump in building approvals. The median forecast in the Bloomberg survey was for a loss of nearly 2%. Instead, they surged 19.1%. This was enough to slash the year-over-year decline from almost 29% to 12.5%. Separately, though some may tie the RBA's neutrality to it, the government unveiled its pre-election (May) budget. It includes A$158 bln in tax cuts over the next ten years and A$100 bln increase in spending. Lastly, the continued rally in iron ore prices (new two-year high) may be helping to lift miner equity prices, but it has not helped the Australian dollar.
After reporting disappointing trade numbers yesterday, South Korea reported soft inflation data today. The headline rate eased 0.2% in March. The median forecast in the Bloomberg survey expected a 0.2% gain. The year-over-year rate eased to 0.4% from 0.5%. It had been expected to rise to 0.7%. The core rate eased to 0.9%, which matches the cyclical low form last August. It had been expected to be unchanged at 1.3%.
Market-moving news from Japan and China were sparse. We note that Apple will reportedly cut iPhone prices in China by 6% and Foxconn indicated it may begin producing the iPhone in India. India is widely expected to cut interest rates on Thursday. It would be the second consecutive cut as the new central bank governor unwinds the two hikes that his predecessor delivered last year. Shades of Draghi and Trichet....
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