A soft German ZEW survey saw European equities in retreat at the start of the overnight session
This was followed up by a higher than expected US CPI which added to the negative tone in US equity markets. Earnings reports overnight for the S&P 500 weren’t bad but the market read them as lacklustre, adding to the gloom. The US headline US CPI came in at 0.5% or 1.8%yoy, up from 1.4%yoy last month and above expectations of 1.6%yoy. This was interpreted as running against the argument of so called doves on FOMC who had been pressing for a continuation of QE (no tapering) on the grounds of inflation running below the Fed’s inflation target.
Meanwhile, the US activity data overnight painted a picture of ongoing recovery. The standout was the NAHB Housing Index which jumped to 57 from 52, well above market forecasts of 51. Now the NAHB index is approaching the levels seen in the mid noughties, before the GFC. For Housing Permits and Housing Starts, due out today, this is good news.
For currency markets, the Greenback was generally weaker overnight, presumably due to positioning ahead of Ben Bernanke’s testimony today. Over the past 24 hours the USD lost ground against all of the currencies in the G-10 basket. Commodity prices rose with the weaker USD, the exception being the price of oil, which came off as tensions in the Middle East seemed less pronounced.
The Aussie dollar rallied yesterday after the RBA Minutes, the market interpreting them as less dovish and cutting the chances of a rate cut in August to 54%, from 63% before the Minutes were released. We acknowledge the outcome of the August RBA meeting will be close but continue to expect a 25bps cut in rates.
Meanwhile, yesterday Rio announced a record output of iron ore for the fist half of the year, its Pilbara operation hitting 127.2mn tonnes, up 6% from last year. However, it warned of cost pressures as its first half spot price fell by 2.8% for the half year, compared with a year earlier.
This morning the AUD has continued to trade with a bid tone and is now approaching its highs for July (0.9306 on 11 July). Today, we expect trading close to the overnight range, with a bias to buy the AUD tonight, running into Ben Bernanke’s speech which could prove to be US dollar negative.
Not much coming up in our time zone today for the markets. The W-MI Leading Index is due in Australia at 10.30am and the Bank of Japan Minutes are due at 9.50am. Given the BoJ’s Minutes are for the penultimate meeting, they are unlikely to be market moving.
In the UK, the Bank of England Minutes are due for Mark Carney’s first meeting as Governor. UK labour market data is also due tonight.
In the US Housing Starts and Permits are due and the market is looking for 5% and 1.5% rises respectively. Also, the Fed’s Beige Book will be released.
Probably the most watched event in the next 24 hours will be Ben Bernanke’s Semi-annual Testimony to the House of Representatives, followed by the Senate the next day. Given the global markets’ fixation on all things to do with the coming Fed tapering of its asset purchases, there will be much analysis of what Bernanke says and what it means for future monetary policy.
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