The key theme at the heart of so many debates is around such subdued inflation and falling inflation expectations in many major economies, which in turn is pushing up ‘real’ yields and flattening the yield curve. It’s this dynamic that it’s causing traders to ask why on earth the Federal Reserve raised three times in 2018 and 2019. And they are also allowing the balance sheet to run-off and it's of course why the markets are only pricing in two hikes through the end of 2019.
Additionally, even though the unemployment rate is at such low levels, and in some areas of the US we are hearing of labour shortages (revert to the recent Beige Book) -- we are simply not seeing wage pressures. Either way, inflation is at the heart of so many conversations, especially when it comes at a time when the Fed, Bank of Canada and Bank of England have shifted to a more hawkish tilt, and certainly relative to market pricing.
As we know, the Fed sees better times ahead, but the market is not so sure and this is driving fixed income and FX gyrations.
On Friday we saw US five-year inflation expectations fall a further two basis points (or 0.02%) to 1.81%. This is the lowest since October and market-based inflation reads take centre stage here. Five-year inflation expectations in Europe have dropped to 1.53%, which is the lowest since November. While in Australia, we can also see falling longer-term inflation expectations and this driving up five-year and ten-year ‘real’ (or inflation adjusted) Aussie government bonds to 39bp and 68bp respectively - the highest levels since mid-May. It’s no surprise, therefore, to see AUD/USD actually looking quite bullish. While there is not a huge amount to drive this week, there will be traders lining up to short the pair, should we see a move into $0.7700 to $0.7720 and trend resistance drawn from the 2016 high.
Aside from the CAD, AUD was the star performer last week in G10 FX, but we are coming back into what has been such an exceptional sell zone for AUD/USD since April 2016. In equity land, it’s steady as she goes for today’s Asia open. The S&P 500 closed largely unchanged, but the sectoral moves should catch the Aussie market somewhat on the wrong foot, on open. If we look at the performance of the ASX 200 last week, we saw solid gains in REITS, healthcare, financials and even consumer discretionary, while we saw moves lower on the week in energy and materials. On Friday (in the US) it was energy that really outperformed, with the S&P 500 energy sub-sector closing up 1.7%, while materials gained 40 bp.
The ASX 200 itself should open where it left off and SPI futures are not giving us too much to work with either. One could make a positive that last week’s low held the prior week's close of 5677 and we can also see on the weekly chart that buyers are happy to step in and defend what is key horizontal support around 5675. Still, it’s tough trading the ASX 200, as price action is scatty and there is just no trend. Just look at the 20-, 50-, or 100-day moving average and we can see these moving perfectly sideways. Traders are happy, therefore, to trade a range in the ASX 200 and SPI futures.
Commodity markets are generally constructive for today’s equity market open, with US crude gaining 0.60% on Friday’s session. Spot iron ore closed up 0.9% on Friday, taking the gains on the week to 2.5% and marking the first, three-day consecutive rally since April. On the Dalian futures exchange, we saw iron ore close up 0.2%, while steel closed unchanged. BHP’s American Depository Receipt (ADR) closed unchanged on Friday and Vale’s US-listing closed up 0.6%.
In terms of event risk for the day’s trade, we get RBA governor Philip Lowe speaking as part of a panel at 9:30am AEST, while at 11:30am AEST we get Aussie new motor vehicle sales and China property prices.