Key themes: Jerome Powell shared the limelight with the US producer price inflation report overnight.
An upside headline surprise in producer price inflation was tempered by a sizeable downside revision to the previous month and more constructive underlying detail.
Overall the data was supportive of further disinflation and did little to move the dial on expectations for further inflation progress in tonight’s US consumer price inflation report.
Jerome Powell struck a familiar tone, arguing for patience after the downward inflation trajectory hit a snag over the start of 2024. Powell again reiterated the Fed’s view that rates are in restrictive territory.
US equities gained pulling up just shy of record highs, treasury yields were lower across the curve and the US dollar slipped.
Share markets: US equities moved higher overnight buoyed by a rally in tech stocks. The S&P 500 rose 0.5% to close just 0.3% shy of its record high. The tech heavy NASDAQ was up 0.8%.
The ASX 200 fell 0.3% yesterday. However, futures gained almost half a percent overnight pointing to a solid open this morning.
It was a mixed showing in Europe. The German DAX sliped 0.1%, the Euro Stoxx 50 was flat and London’s FTSE 100 rose 0.2%.
Interest rates: US treasury yields initially spiked in response to stronger than expected headline US producer price inflation data. However, a more benign underlying picture saw yields quickly unwind and move lower throughout the session. Comments from Jerome Powell reiterating the need for patience supported the move lower in yields.
The US 2-year yield jumped to a high of 4.89% before slipping to 4.81%, 5 basis points below yesterday’s close. The 10-year yield also finished the session 5 basis points lower at 4.44% after briefly touching a high of 4.53%.
Aussie bond futures followed the lead from the US. The 3-year futures yield rose 2 basis points to 3.97%, while the 10-year yield rose 1 basis points to 4.35%.
Foreign exchange: The US dollar slipped against every G-10 major save the Japanese Yen. The DXY index fell from a high of 105.46 to a low of 104.96 and is currently trading marginally back above the 105 handle.
The Aussie dollar rose, but remained comfortably within the last week’s trading range. The AUD/USD traded from a low of 0.6580 to a high of 0.6628 and is currently trading slightly below that level.
The euro (+0.3%) and the British Pound (+0.3%) both gained. The USD/JPY consolidated gains above 156 despite the 10-year Japanese government bond yield hitting its highest level since November last year and in doing so equalling the highest level since early 2012.
Commodities: Commodity prices were broadly lower overnight. West Texas Intermediate (WTI) oil futures fell 1.4% to US$78.02 per barrel despite data showing US crude inventories fell by 3.1 million barrels last week and Russia’s oil exports fell to an eight-week low over the week ending 12 May.
Copper slipped 0.8% but held comfortably above US$10k per metric tonne, while iron ore dropped 1.9% to US$114.15 per metric tonne. Gold bucked the trend, rising 0.9% to US$2358.12 per ounce.
Australia: The Government is walking a fine line on spending in the Budget to keep the economy on a narrow path. The cost-of-living squeeze is real, but the Government does not want to stoke inflation further. Many measures have been designed to lower reported inflation, including expanded energy bill relief, greater rent assistance and cheaper medicines. The government’s forecast of headline inflation reaching 2.75% by the end of 2024-25 is a little below our own forecast, but it is entirely plausible. These changes should not materially shift the timing of RBA decisions on rate cuts.
But new spending – including on housing, infrastructure and the care sector – adds additional stimulus. Most of the net new spending (close to $20bn) is front-loaded into 2024-25 and 2025-26.
After recording a second consecutive surplus in 2023-24, the budget swings into a bigger deficit than we expected in 2024-25. Some of this stems from the new spending and slower nominal growth. As in past years, though, conservative assumptions about commodity prices and bond yields also contribute. One can’t rule out another positive surprise in the 2024-25 final outcome in 12 months’ time. And at 1% of GDP, the projected deficit for 2024-25 is notably smaller than those in many peer economies.
Euro Zone: Governing Council member Klaas Knot said the next policy meeting may be the right time to start lowering borrowing costs, reinforcing expectations that monetary policy easing could be imminent. The Dutch central bank chief said “we will have new projections, and I’m confident again that if they confirm the picture as I just sketched it, that June will be a good opportunity to make a first move in removing restriction”. Belgian central bank governor, Pierre Wunsch caveated that the ECB shouldn’t rush into further interest rates cuts after a like first move in June flagging strong wage pressures as a reason to “proceed gradually and not too quickly”.
ZEW economic growth expectations continued to grind higher in May rising to 47.0 from 43.9 in April. This was the strongest reading since February 2022 as optimism continues to improve alongside more constructive economic growth indicators.
German inflation was finalised unchanged at 0.5% in April. Annual inflation was also steady at 2.2%.
New Zealand: Retail card spending fell 0.4% in April, the fourth fall in the last five months. Sluggish card spending activity suggests weakness is extending into the June quarter.
Net overseas migration slowed to 4.9k in March while February’s 7.6k gain was revised down to 6.3k. Annual migration slowed for a fourth straight month to 111.5k.
United Kingdom: The ILO unemployment rate edged up to 4.3% in March from 4.2% in February as widely expected. The unemployment rate has ticked up over first three months of 2024 as employment growth slows and the jobs market continues to cool.
However, annual growth in average weekly earnings topped consensus, holding unchanged to 5.7% compared to expectations for a more mild 5.5% gain. Sticky wages growth in the face of a cooling labour market may complicate the rate cut picture for the Bank of England (BoE). Importantly, the recent wage figures came comfortably within the BoE’s own forecasts which will help temper any concerns.
United States: Jerome Powell said “the first quarter in the United States was notable for its lack of further progress on inflation” but reiterated that policy was restrictive on many measures and that “we’ll need to be patient and let restrictive policy do its work”. The remarks did little to deviate from the higher for longer rhetoric reinforcing expectations of a long pause in interest rates.
An upside surprise to headline producer price inflation in April was tempered by a sizeable March revision and less intimidating underlying detail. The producer price index (PPI), which measures cost pressures faced by businesses and is an important leading indicator for consumer price inflation, rose 0.5% in April surpassing expectations for a 0.3% increase. However, the sharp increase was flattered by a downward revision to March’s reading from 0.2% to -0.1%. Additionally, the survey detail revealed that key components feeding into the Fed’s preferred inflation measure, the core personal consumption expenditure deflator, were more constructive. In annual terms the PPI rose to 2.2% from 1.8% previously and has been tracking moderately higher over the start of 2024.
