According to Capital Economics: the bar to lifting US rates higher is high, and the Fed is close to halting the run-off of its balance sheet.
“The upshot is we now expect the Fed to leave rates unchanged throughout this year, before a further deterioration in economic growth forces it to cut rates by a total of 75bp in 2020,” Capital Economics’ Paul Ashworth said in a note.
As for the balance sheet, Mr Ashworth sees a $US3.5 trillion end point. “Officials seem persuaded that they should halt the run-down even before reserves fall to their desired long-term level, which is presumably a bit below the current $US1.6trn.
“Reserves would then continue to fall gradually, as currency in circulation continued to expand. After the Fed stops its run-down, it would begin reinvesting the proceeds of maturing MBS into Treasury securities, since it wants to hold only the latter in the long-run.”
Locally, the focus will again be on corporate results as well as the January jobs report.
In terms of results: Sydney Airport, Qube, Audrill, Webjet, Santos, Origin, Wesfarmers, Coca-Cola Amatil, Nine, MYOB, Flight Centre among others.
“January is seasonally a weak month for employment as seasonal jobs are no longer required, but this is adequately captured by the seasonal adjustment process,” TD said in a preview note.
“We look for +20k jobs for January, and with an unchanged participation rate of 65.6% leaves the unemployment rate at 5.0% (mkt +15k and +5.0%). An average monthly addition of +20k/m leaves the unemployment rate steady at 5%, which is the RBA’s expectation. The Bank’s downside risks will be exacerbated if the unemployment rate starts to creep towards 6% again.”
Corporate results pending: Sydney Airport, Qube, Audrill, Webjet, Santos, Origin, Wesfarmers, Coca-Cola Amatil, Nine, MYOB, Flight Centre among others.
Local data: Labour force January
NAB’s preview of jobs data: “NAB expects slower growth in employment (NAB: +10k vs market: 15k) and unchanged unemployment at 5.0% (mkt: 5.0%), albeit with the risk that it ticks up to 5.1%.”
Westpac: “Job creation of 22k in Dec beat consensus, as it did in Nov. For the Jan data due 11:30am Syd/8:30am Sing/HK, the median forecast is a familiar +15k. Westpac is in line with consensus given that such an outcome would be consistent with annual jobs growth of just over 2%. We see the unemployment rate holding steady at 5.0%, on the assumption that the participation rate holds at 65.6%. AUD is more likely to respond to a downside than an upside surprise.”
Overseas data: Japan Nikkei manufacturing PMI February; Euro zone January CPI, Markit manufacturing and services PMIs February; US Phill Fed February, Markit PMIs February, Leading index February
SPI futures up 6 points at about 8.15am AEDT
AUD flat at 71.63 US cents
On Wall St: Dow +0.2% S&P 500 +0.2% Nasdaq flat
In New York, BHP +1.8% Rio +1% Atlassian +0.2%
In Europe: Stoxx 50 +0.6% FTSE +0.7% CAC +0.7% DAX +08%
Spot gold +0.2% to $US1343.83 an ounce at 1.47pm New York time
Brent crude +1% to $US67.13 a barrel
US oil +1.8% to $US57.10 a barrel
Iron ore -1.4% to $US88.00 a tonne
Dalian iron ore +0.4% to 624 yuan
LME aluminium +0.7% to $US1868 a tonne
LME copper +1.4% to $US6405 a tonne
2-year yield: US 2.50% Australia 1.70%
5-year yield: US 2.47% Australia 1.72%
10-year yield: US 2.65% Australia 2.10% Germany 0.10%
US-Australia 10-year yield gap at 6.38am AEDT: 55 basis points
From Today’s Financial Review
Why Glasenberg buckled on coal: It turns out, the Church of England – a rich investor in its own right – has played an influential role in taking the message of Paris and climate change mitigation directly to Glencore.
Woolies’ existential earnings problem: A tough quarter for Australia’s biggest retailers appears to have elevated the issue of balancing short and long-term priorities to an almost existential question.
Brett Gillespie predicts RBA rate cut: The market veteran thinks that there’s a 30 per cent chance of an interest rate cut by April, and a 60 per cent chance of a cut by August, which is higher than futures imply.
US recession fears overstated: Goldman: The US economy may be strong enough to justify further rate rises, according to Goldman’s chief global equity strategist.
The S&P 500 eked out its seventh gain in eight sessions as the record of the gathering reinforced the Fed remains committed to its patient approach to further hikes without ruling them out if economic growth picks up. Caterpillar rallied after giving a bullish forecast for demand in China, lifting shares in materials producers.
The minutes showed that many participants were not yet clear what adjustments to rates might be necessary later this year.
“They are open to rate hikes down the road and the market has not priced in the potential for rates to go up rather than down from here. I think that might be behind the market reaction,” sad Kathy Jones, chief fixed income strategist at Schwab Center for Financial Research in New York.
A dovish Fed and progress in trade negotiations have helped the S&P 500 rise about 18 per cent from its lows in December, when the market swooned on fears of an economic slowdown. The index is trading about 5 per cent below the record closing high it hit in late September.
Joint statement from Theresa May and Jean-Claude Juncker, who said they agreed to talk again later this month.
Blow to Theresa May as Tory MPs quit: The new ‘Independent Group’ of ex-Labour MPs welcomes three Conservatives, as PM May ramps up her push for a compromise.
UBS hit with $7.1b of tax fraud penalties: A French court found Swiss bank UBS guilty of illegally soliciting clients and laundering the proceeds of tax evasion.
Trade talks between the world’s two biggest economies helped European shares rise on Wednesday, while the threat of a blocked merger sank shares in British supermarket Sainsbury’s and a money laundering scandal hit Swedbank.
Germany’s trade-sensitive DAX led the way with a 0.8 per cent gain and the pan-European STOXX 600 rose 0.7 per cent after US President Donald Trump said on Tuesday that trade talks with China were going well.
Although autos, which are vulnerable to rising protectionism, jumped 2.4 per cent but there were still reasons for investors to remain cautious.
“There’s no big material news out there that will give us a sustained uptick to markets,” Gary Waite, portfolio manager at Walker Crips Investment Management, said.
British supermarket chain Sainsbury’s and Swedish lender Swedbank marred the positive picture overall.
Sainsbury’s shares sank 18.5 per cent after Britain’s competition regulator said its merger with Asda should either be blocked or need significant concessions.
“Investors are rightly accepting that this deal is dead in the water”, commented Neil Wilson from Markets.com.
Britain’s retail index fell 2.9 per cent with rivals like Morrison losing 5.3 per cent.
Swedbank shares ended the day 13.6 per cent down after Estonia said it was investigating allegations linking Swedbank to suspicious transactions in the country involving Danske Bank.
Britain pushes back on Huawei 5G ban: Britain’s top cyber spy defends allowing Huawei into the UK’s 5G network, a sign of British resistance to the US and Australia.
Hong Kong stocks ended higher on Wednesday on hopes that Beijing and Washington will broker a trade deal and de-escalate their year-long tariff war.
At the close of trade, the Hang Seng index was up 1 per cent at 28,514.05 points, while the Hang Seng China Enterprises index also ended 1 per cent higher. Gains were seen across the board.
China has not and will not change its prudent monetary policy and will not resort to “flood-like” stimulus, Premier Li Keqiang said. “I reiterate that the prudent monetary policy has not changed and will not change. We are determined not to engage in ‘flood-like’ stimulus,” Li said at a cabinet meeting, according to a statement on the government’s website.
The Nikkei share average ended 0.6 per cent higher at 21,431.49, the highest closing since December 17.
The gain came despite Japan’s exports suffering their biggest drop in more than two years in January, as China shipments tumbled and orders for machinery goods fell sharply.
The Japanese market largely shrugged off the weak trade data, which showed that exports fell 8.4 per cent from a year earlier, focusing instead on improved prospects of a US-China trade deal that could boost equity markets.
“There are concerns about Japan’s falling exports, but to investors who haven’t caught up with the recent rally in Japanese stocks, there is a risk that they will fall behind the market’s further rise if the trade talks go well,” said Hiroyuki Ueno, a senior strategist at Sumitomo Mitsui Trust Asset Management.
Toyota Motor rose 1.4 per cent and Mazda Motor added 0.9 per cent.
Among index heavyweights attracting buyers, SoftBank surged 3.6 per cent and Daikin Industries climbed 2.2 per cent.
Federal Reserve meeting minutes link
Federal Reserve officials widely favoured ending the runoff of the central bank’s balance sheet this year while expressing uncertainty over whether they would raise interest rates again in 2019, minutes of their January meeting showed.
“Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year,” according to the official record of the Fed’s most recent policy meeting. “Several of these participants argued that rate increases might prove necessary only if inflation outcomes were higher than in their baseline outlook.”
The US central bank caught markets off guard last month by suspending a three-year campaign to raise interest rates, saying it would be patient about making any adjustments to its target range for short-term interest rates, now at between 2.25 per cent and 2.5 per cent.
It also signalled it may slow or end reductions to its $US4 trillion balance sheet, a process it had previously characterised as being on automatic pilot.
BAML on the Australian rates: “There are some tentative reasons for the Reserve Bank of Australia (RBA) to feel a little more comfortable with the shift to a clear neutral bias. Global financial conditions have eased, there is some evidence the housing market in major cities has started the year in better shape (chart of the day) while there are signs credit dynamics might be starting to change. Further bad news is needed to support lower AU rates.
“If the early signs of stabilisation in housing are confirmed, then current pricing and positioning for possible rate cuts over the coming months could be tempered. There are still significant risks to the outlook, but RBA policy patience and a new focus on carry could put key support for the 3y10y curve at 40bp at risk. Greater policy convergence between the RBA and the Reserve Bank of New Zealand (RBNZ) support our view for a flatter AU 2y5y curve relative to NZ.”
Glencore waves the white flag on coal: The famously aggressive Swiss-based miner and commodities trader has been convinced to wave the white flag on growth, revealing a backflip on coal on Wednesday night.
A third of Qld’s LNG industry at risk of closure: Queensland’s LNG plants are never likely to be fully utilised and two trains may shut down by 2025 due to failing coal seam gas reserves, EnergyQuest has warned.
Palladium smashes $US1500 mark: Palladium surged above $US1500 an ounce to a record, extending a powerful rally that’s been driven by an acute shortage of supply.
Copper prices hit a seven month peak on Wednesday as the market worried about low stocks ahead of seasonally strong demand in top consumer China.
“Demand should pick up as we move into the second quarter and stocks are low. It could be quite an explosive mix,” said Citi analyst Oliver Nugent.
“Copper stocks have not built nearly as much as would have been expected so far this winter, meaning a lower base from which to draw during the second quarter.
Citi expects to see copper prices rise to $US6700 a tonne over the next three to six months.
Listed real estate is no longer boring: Investors in Goodman and Charter Hall achieved returns of 60 per cent in the past year, blowing away the staid and somewhat boring image of the past.
Australian shares dipped on Wednesday as disappointing wage data and earnings pushed the local sharemarket lower.
The S&P/ASX 200 Index fell 10.4 points, or 0.2 per cent, to 6096.5 while the broader All Ordinaries slid 8.4 points, or 0.1 per cent, to 6175.8.
“The Australian market has slipped into negative territory as investors and traders digest a raft of earnings results,” said Validus Equities executive director Adam Joseph.
PE bigwig Partners Group poaches to boost Australian chase
Ex-Future Fund private equity team hits ground running
BGH Capital squeezes banks for Navitas loan
with Reuters, Bloomberg, AAP
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