Market Recap

Stock markets continued to fall yesterday, and this morning in Asia they’re down further in early trading. But most of the damage to currencies was done in early Asian trading time yesterday in any case. Generally speaking, they recovered somewhat during European and US trading, and now it’s what we might call a “biblical market,” as in “first will be last and the last, first.” Just to refresh your mind, here’s the order of the currencies when I wrote this comment yesterday:

So not strictly “first  last” but pretty close: the first currency yesterday (JPY) is the next-to-last today, and the last currency yesterday (AUD) is the first today. But note that today’s fall for JPY was much much less than yesterday’s gain, while the recovery for AUD was much much less than the fall. Apparently by the end of trading there was some profit-taking on the steep early moves, but the concerns that prompted those moves are still there, namely the sudden stop in the US-China trade talks. The talks had appeared to be going smoothly towards a conclusion this week but instead the US side late yesterday confirmed that it was prepared to raise tariffs on some $200bn of Chinese imports as early as Friday morning in response to what they called an impasse in the talks.

It’s also interesting to me that while EUR also reversed somewhat, USD didn’t – it was down yesterday morning and it’s down a bit further this morning, too. That may be an acknowledgement that the tariffs hurt the US as much as they hurt China, since they are in effect a tax on US consumers.

Note that Chinese foreign ministry said that officials are still planning to travel to the US for the next round of talks. That suggests to me that some compromise is still possible, indeed likely. I think there could be further profit-taking on Monday morning’s sharp moves – I would still buy Monday’s losers & sell the winners (although note that this was written before the results of this morning’s Reserve Bank of Australia meeting were known – that’s probably the decisive short-term factor for AUD.)

 

Today’s market

The main event is once again overnight when the Reserve Bank of New Zealand (RBNZ) meets. This meeting should be particularly interesting as it’s the first one under the new governance system.

At the last meeting (March 27), Gov. Orr said, “Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down.”

The market’s estimate of the likelihood of a near-term rate cut immediately jumped. The odds of a rate cut this year doubled to 80% -- i.e., a near-certainty – from 42% -- i.e., less than a 50-50 chance. (The odds currently stand at 79%.) The market now estimates the likelihood of more than one cut this year as slightly higher than the probability of only one cut (46% vs 38%). As recently as December, investors saw no chance of a cut at all and a fairly high probability of a hike (not shown).

The market puts the chances of a cut at this meeting at 45%. Gov. Orr also said at the last meeting that “Core consumer price inflation remains below our 2 percent target mid-point, necessitating continued supportive monetary policy.” Since then, core consumer price inflation did indeed remain below the 2% target midpoint, as did headline inflation.

The wild card of course is that this meeting is the first under the new framework for monetary policy decisions at the RBNZ. The current single-decision-maker model, where Gov. Orr has responsibility for monetary policy, will be replaced by a monetary policy committee (MPC) that will have formal responsibility for policy. In addition, the MPC will have a “dual mandate” to secure “maximum sustainable employment,” like the Fed has. In practice, these changes are basically just formalizing and making explicit the way that the RBNZ works anyway. However, the committee, which includes three outsider among its seven members, could come to different decisions than were reached before.

If the RBNZ doesn’t cut rates at this meeting, then I think people will assume it will cut at the next meeting (June 26th), unless there’s a surprising change in the bias expressed in the statement. That’s entirely possible; elsewhere in the world, particularly China, things have been looking up and the MPC could take a rosier view of the outlook. I think there is a small chance of a less dovish statement that would boost NZD. But it doesn’t seem likely.

As for the day’s indicators, the US Job Openings and Labor Turnover Survey (JOLTS) is expected to show a rebound in the number of job openings relative to the previous month’s oddly low figure, but still in line with the recent downtrend in openings. Nonetheless, given the recent fall in the number of unemployed persons, this would still be quite a healthy figure – an openings/unemployed ratio of 1.18, vs 1.14 the previous month and 1.17 the month before, when openings were near their record high. I think this would corroborate the healthy labor market in the US and would therefore be positive for the dollar.

Then again overnight comes the China trade data. The market expects the nation’s trade surplus to be little changed as the pace of export growth slows substantially but the pace of decline in imports also slows. I think signs of stabilization in China will tend to be positive for risk and therefore positive for AUD & NZD. But of course any developments on the trade front with the US-China tariff negotiations will be more important.

 

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Marshall Gittler

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