Yesterday’s FOMC minutes indicate that the bank was in “if” mode, as in, if data supports a rate hike, U.S policy makers ‘could’ increase rates at the next meeting on June 14-15.
Accompanying the “if” message were the usual disclaimers – the bank is of course concerned about the state of the economy, domestically and abroad.
Nevertheless, it seems that Fed members also think the market has the odds of a June hike “unduly” low.
That sentiment alone has now given the market the green light to actively price in a “live” June meet, and this despite Brexit event risk being around the corner (June 23).
1. U.K sales jump as consumer waves off Brexit worries
Sterling (£1.4648) has got a massive boost from this morning’s economic release.
U.K. retail sales rose strongly last month (+1.3% m/m, +4.3% y/y). This would indicate that the U.K consumer is unperturbed by the uncertainty over the outcome of next months referendum (June 23) on the U.K.’s membership of the EU.
Digging deeper, the bulk of the growth is being fuelled by discounting and sales at department stores. Aiding sterling’s run this morning are the positive backward revisions – March’s sales figures were also revised higher.
Combine today’s retail sales with yesterday’s healthy U.K employment data and one could conclude that the U.K consumers seems to be handling any “Brexit” related uncertainty very well, and this despite some business investment (CAPEX) being delayed.
2. Oil hit by strong dollar and stock supplies
Crude oil prices have edged lower ahead of the U.S open, pushed down mostly by a stronger dollar.
Despite the decline, Brent (-2.2% to $47.87) and WTI (-2.0% at $47.25) continue to hover near their respective month highs on production disruptions.
Oil prices began their price retreat late yesterday after FOMC minutes indicated that the Fed could raise U.S. interest rates as early as next month. Higher rates make the “big” dollar more attractive.
Traders continue to monitor a number of event risks that could have a material impact on global supply. There is political upheaval in Venezuela as well as oil delta sabotage in Nigeria and wildfires in Canada to consider when discussing global supply.
Yesterday’s weekly EIA report in the U.S., revealed that crude-oil inventories unexpectedly rose by +1.3m barrels to +541.3 m. U.S inventories continue to hover near their all-time highs, supporting the continuing global “glut” of crude argument.
Commodity sensitive currencies are taking the fall. The Aussie has dropped to a two-and-a-half month low (A$0.7191), while the ‘buck hits a six-week high against the loonie (C$1.3078)
3. G7 and Fed rhetoric in the ‘crosshairs’
Market eyes will begin to focus on the outcome of this week’s G7 meet beginning today in Japan.
There are a number of conceivable themes to be aware of – intervention talk, tax cuts and the possibility of the Bank of Japan (BoJ) introducing additional fiscal stimulus.
With the market having being firmly focused on the Fed, it’s been suggested that dealers are underpricing the risk of additional stimulus from Governor Kuroda at the BoJ. If so, then there is a significant market risk from the two-day G7 meet up in the city of Sendai.
Fed rhetoric is not done yet – investors are now waiting for speeches by Federal Reserve Vice Chair Stanley Fischer and New York Fed President Dudley later today.
Be forewarned, market sentiment will quickly turn more “big” dollar positive if one, or both, signal the possibility of a Fed rate increase next month.
4. Aussie jobs mixed
Aussie April employment data was mixed overnight; the employment headline change recorded a ‘small’ miss (+10.8k vs. +12.0ke), while the unemployment rate beat most analysts expectations (+5.7% vs. +5.8%e). However, the biggest disappoint was the decline in the participation rate to a new ten-month low (+64.8%).
The full-time component declined for the second consecutive month, while total hours worked fell for the third straight month, and by the biggest margin in nearly four-years.
The fixed income market is beginning to price in another -75bps or more cut by the Reserve Bank of Australia (RBA) over the next two-years. This is collectively adding pressure to the AUD across the board. Outright, AUD/USD has extended its decline towards A$0.7200 – a two and a half month low.
5. Euro bourses see red
Ahead of the U.S open, European equity indices are trading sharply lower this morning, as renewed expectations for a June rate hike by the Fed weigh on equity markets worldwide.
Lower oil prices in todays session is also contributing to the markets “risk off” sentiment. It’s not surprising that both commodity and mining shares are leading the losses in the U.K. The threat of ‘higher rates’ tends to be supportive of financial stocks and it’s those that are leading the gains.
Indices: Stoxx50 -1.1% at 2,923, FTSE -1.5% at 6,076, DAX -1.5% at 9,791, CAC 40 -0.9% at 4,280, IBEX 35-35 -0.4% at 8,742, FTSE MIB -0.7% at 17,594, SMI -0.6% at 7,928, S&P 500 Futures -0.4%.