European Outlook: Asian markets were mixed after returning from the holidays, with ASX and Hang Seng selling off, while the Nikkei close up 0.35% at 18,418. Australia’s market was hit by a drop in the mining sector amid the slump in iron ore and as concerns about the housing sector is denting the recent optimism in financials. The Hang Seng was hit by catch up trades after losses on mainland exchanges. FTSE 100 futures are also down, while U.S. futures are narrowly mixed. Oil prices are little changed, with the front end WTI future trading at USD 52.65 per barrel. Geopolitical factors continue to weigh and European markets have to digest Erdogan’s narrow victory in his bid to extend the presidential powers and the prospect of a tight Presidential election in France on the weekend. Amid this core bond markets are likely to remain supported and Draghi will keep a close eye on spread amid lingering risk aversion. Today’s calendar is unlikely to bring major surprises, with the final Eurozone HICP reading for March expected to be confirmed at 1.5% and EMU trade numbers usually not a market mover.
RBA Minutes: Steady rates consistent with growth and inflation targets, labour and housing markets “warranted careful monitoring” in coming months, Labour market somewhat weaker than expected, keeping wage growth low, Household consumption growth little weaker than expected in early 2017. CPI expected to pick up above 2 pct in 2017, core inflation to rise more slowly. RBA minutes repeats a rising in A$ would complicate economic adjustment, GDP likely expanded at moderate pace in Q1, impact of cyclone Debbie unlikely to be large. Commodity prices to boost national income in Q1, but terms of trade to decline from here, saw rising risks in household debt, housing markets. Finally – global growth accelerating broadly, Chinese economy appeared to have strengthened; protectionist policies in US still a risk. AUD sold off overnight and AUD USD currently trades at 0.7554 down from Mondays high at 0.7610.
US Data Yesterday: The NAHB homebuilder sentiment index fell 3 points to 68 in April after climbing 6 points to 71 in March (revised from 71), which was the highest since June 2005. It was 58 a year ago too. The single family sales index dipped 3 points to 74 after surging 6 points to 77 previously (revised from 78). But it’s been over 70 for five straight months, a sign of continued demand for new construction, according to the report. The future single family index fell 3 points to 75 after a 5 point pick up in March to 78. The index of prospective buyer traffic slipped 1 point to 52 from 53 (revised from 54). The Empire State headline plunged to a 5-month low of 5.2 from 16.4 in March and a 29-month high of 18.7 in February, versus a similar 6.5 in January. Yet the component data were mostly solid, and the ISM-adjusted Empire State remained unchanged at the 6-year high of 55.2 in March, versus 54.5 in February and 50.7 in January. The April headline drop coincided with declines in the orders and workweek components after big March increases, but all the remaining components rose.
Fedspeak: Fed VC Fischer did not discuss the policy course in his prepared remarks on “Monetary Policy Expectations and Surprises.” Rather it was a more academic summation of the Fed’s communications. He also pondered, can the Fed be too predictable, to which he answered “it is hard to argue that predictability in our reaction to economic data could be anything but positive” and he noted the clarity of the Fed’s reaction function allows the market to anticipate Fed actions and smoothly adjust. However, there could be some difficulties with respect to unexpected shocks to the economy if it appeared the FOMC was not being sufficiently responsive to incoming data that might affect the outlook. He does not look for a major market disturbance akin to the taper tantrum this time around as the FOMC shrinks its balance sheet, especially given the limited market reaction to the indication in the March FOMC minutes that a wind-down.
Main Macro Events Today
- U.S. Housing Starts – March housing starts data is out later and should reveal a 1,256k pace for starts, up from 1,246k in January and 1,279k in December. Permits for the month should be 1,260k, up from 1,216k in February and completions should be 1,120k from 1,114k in February. The March NAHB posted an increase to 71, up from 65 in February before dipping back to 68 in April.
- U.S. Industrial Production – March industrial production data is also out today expectations are for a 0.4% headline gain after a 0.1% headline in February and -0.1% in January. The capacity utilization rate should rise to 76.1% from 75.9% in February. Mining and manufacturing hours worked from the March employment report were firm which could lend some upside risk to the headline.
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